FutureFuel Would Make A Great Acquisition

FutureFuel Would Make A Great Acquisition

One of the cheapest stocks in our All Investable – Deep Value Stock Screener is FutureFuel Corp. (NYSE:FF).

FutureFuel is a leading manufacturer of diversified chemical products and biofuels. FutureFuel’s chemicals segment manufactures specialty chemicals for specific customers (“custom manufacturing”) as well as multi-customer specialty chemicals (“performance chemicals”). FutureFuel’s custom manufacturing product portfolio includes a laundry detergent additive, proprietary agrochemicals, adhesion promoters, a biocide intermediate, and an antioxidant precursor. FutureFuel’s performance chemicals products include a portfolio of proprietary nylon and polyester polymer modifiers and several small-volume specialty chemicals and solvents for diverse applications. FutureFuel’s biofuels segment primarily produces and sells biodiesel to its customers.

A quick look at the company’s share price history over the past twelve months shows that its share price has risen 14% to $13.76 from $11.91 in January 11, 2016. I believe FutureFuel is still undervalued, has plenty of growth opportunities, and would make an excellent acquisition.

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(Source: Google Finance)

EPS Growth

FutureFuel has been successfully growing its revenues over the past twelve months. A quick look at the company’s quarterly income statements below shows the company has increased revenues by 109% (ttm) while maintaining net margins around 13% in Q3 of 2016.

Quarterly Income Statement (Amounts in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Total Revenue $69,306 $67,879 $46,635 $33,872
Cost of Revenue $58,987 $59,907 $35,582 $4,359
Gross Profit $10,319 $7,972 $11,053 $29,513
Operating Income $7,841 $5,376 $8,529 $27,084
Net Income $12,868 $14,224 $10,569 $29,647

(Source: Company reports)

While revenues look good for the trailing twelve months, revenues has actually declined 30% for the nine months ending September 30, 2016, when compared to the pcp. The reason is lower sales in both the company’s pipeline business in biofuels and in the chemical segment. Specifically, the pipeline business of the biofuel segment is down $57 million while sales of custom chemicals (unique chemicals produced for specific customers) are down $24 million, to customers servicing the agrochemical and energy markets.

For the same nine month period however, the company has seen a significant increase in its net income, up 131% from $16 million to $37 million and a 126% increase in EPS from $0.38 to $0.86. This increase was due to i) the benefit of tax credits and incentives which weren’t in effect in the pcp, ii) the benefit of the EPA’s final rule on the Renewable Fuel Standard; and iii) the favorable reversal of a state’s previous tax treatment of tax credits and incentives.

Biodiesel now meets the EPA’s definition as an Advanced Biofuel

The future looks bright for FutureFuel with the company well placed to benefit for the EPA’s recent announcement that Biodiesel now meets the EPA’s definition as an Advanced Biofuel. Biodiesel is made from an increasingly diverse mix of resources such as soybean oil, recycled cooking oil, and animal fats, biodiesel is a renewable, clean-burning diesel replacement that can be used in existing diesel engines. It is the first and only commercial-scale fuel produced across the U.S. to meet the EPA’s definition as an Advanced Biofuel – meaning the EPA has determined that biodiesel reduces greenhouse gas emissions by more than 50 percent when compared with petroleum diesel. Americans used nearly 2.1 billion gallons of biodiesel last year.


FutureFuel should also benefit from having a new and experienced COO, Thomas Mc Kinlay, following the resignation of Paul Lorenzini in August, 2015. McKinlay’s experience in the oil and gas industry includes responsibility for large scale refining and trading operations, midstream assets, renewables production and trading, retail, contract negotiation, and mergers and acquisitions.

Strong Balance Sheet

FutureFuel is financially robust and continues to have a very strong balance sheet. A quick look at the company’s quarterly balance sheet (below) for the trailing months shows the company has cash and cash equivalents of $293 million and zero debt. When you consider that the company’s current market cap is just $602 million, when we subtract its cash and cash equivalents that means FutureFuel is selling for an Enterprise Value of $308 million.

Quarterly Balance Sheet (Amounts in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Cash and Cash Equivalents $182,373 $173,600 $148,312 $154,049
Short-Term Investments $111,009 $92,064 $76,203 $74,667
Short-Term Debt / Current Portion of Long-Term Debt $0 $0 $0 $0
Long-Term Debt $0 $0 $0 $0

(Source: Company reports)

We prefer the use of Enterprise Value (EV) as it’s a better indication of the total cost to acquire a company in its entirety. EV is calculated as follows:

Market Cap + Preferred Equity + Non-Controlling Interests + Total Debt – Cash and Equivalents

We favor EV over market capitalization as it includes additional liabilities–like debt, preferred equity and non-controlling interests–that must be taken on by an acquirer.

In terms of FutureFuel as an acquisition it’s important to consider that the company had $49 million in operating earnings (ttm). With an Enterprise Value of $308 million and operating earnings of $49 million (ttm), that means FutureFuel has an Acquirer’s Multiple of 6.31 or, 6.31 times operating earnings. FutureFuel represents good value and has the type of balance sheet that acquirers look for, lots of cash and little or no debt.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Income*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

Loads of Free Cash Flow

FutureFuel is a well run company that is operationally efficient. A quick look at the company’s cashflow statements over the trailing twelve months below shows the real strength of the company. FutureFuel generated $56 million in operating cash flow (ttm) and had capex of just $4.3 million (ttm). That means the company generated $51.7 million in free cash flow (ttm) for a FCF/EV yield of 17% (ttm).

Quarterly Cashflow Statement (Amounts in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Net Income $12,868 $14,224 $10,569 $29,647
Net Cash Flow-Operating $30,851 $44,831 $1,197 -$20,299
Capital Expenditures -$853 -$1,357 -$897 -$1,193

(Source: Company reports)

With that amount of free cash the company makes for an attractive acquisition. It also means FutureFuel has a number of options in terms of its own capital allocation. It’s free to explore other assets for acquisition, repurchase shares, or pay out dividends, which is precisely what what we saw when the company announced in November, 2016 that it had declared a special cash dividend of $2.29 per share on its common stock. The company also announced that it had declared for calendar year 2017 normal quarterly dividends of $0.06 per share.

Institutional Shareholders

One last thing I like to do when I’m analyzing stocks is take a quick look at their institutional ownership. One name that popped up during my analysis of FutureFuel was Ariel Investments. One of our favorite investors, John Rogers is the Chairman, CEO & Chief Investment Officer at Ariel Investments. It seems John Rogers is also bullish on FutureFuel with a new addition to his portfolio in September 2016:

Date Action Shares
2016-09-30 New 274,100

(Source: NASDAQ.com)


FutureFuel is a very well run company that is operationally efficient. With its strong balance sheet and solid free cash flows this is exactly the type of business that acquirers seek. The company is well placed to capitalize on the EPA’s announcement that biodiesel now meets the EPA’s definition as an Advanced Biofuel and it has a new and experienced COO to take the company forward. In terms of its valuation, FutureFuel represents good value with an Acquirer’s Multiple of 6.31 or, 6.31 times operating earnings and a free cash flow yield of 17% (ttm), plus it’s paying a nice dividend yield of 2% (ttm).

The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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