Value Play: FutureFuel (NYSE: FF)

On March 15^th, President Obama travelled to Argonne National Laboratory outside of Chicago to give a speech on renewable energy policy. He picked Argonne because it is at the forefront of high-tech vehicle research aimed at weaning cars off of gasoline. In the speech, Obama said the following:

The only way to really break this cycle of spiking gas prices is to shift our cars and trucks entirely off oil. That’s why, in my State of the Union address, I called on Congress to set up an Energy Security Trust to fund research into new technologies that will help us reach that goal.

We can support scientists who are designing new engines that are more energy efficient; support scientists that are developing cheaper batteries that can go farther on a single charge; support scientists and engineers that are devising new ways to fuel our cars and trucks with new sources of clean energy — like advanced biofuels and natural gas — so drivers can one day go coast to coast without using a drop of oil.

On the same day as this speech, the White House released a fact sheet outlining Obama’s “Blueprint for a Clean and Secure Energy Future.” One of the main proposals is to create an energy security trust that:

sets aside $2 billion over 10 years and will support research into a range of cost-effective technologies – like advanced vehicles that run on electricity, homegrown biofuels, fuel cells, and domestically produced natural gas. The mandatory funds would be set aside from royalty revenues generated by oil and gas development in Federal waters of the Outer Continental Shelf (OCS).

Simply put: at least for the next four years while President Obama resides in the White House, producers of renewable energy will have a tailwind of additional government financial support. Existing federal subsidies already exist. In December 2007, the Energy Independence and Security Act of 2007 was enacted which expanded the Renewable Fuel Standards (RFS) beyond ethanol to include specific production quotas biodiesel. In July, 2010, the biodiesel requirement became effective, requiring that a certain percentage of the diesel fuel consumed in the U.S. be made from renewable sources. The biodiesel mandate increased each year and reached 1.28 billion gallons per year in 2013.  Beyond 2013, the biodiesel mandate’s minimum is 1.0 billion gallons per year, but federal agencies have the discretion to ratchet the annual requirement higher. The real growth engine in the RFS involves the mandate for cellulosic-based biofuel, which was scheduled to increase 16-fold between 2013 and 2022 until a federal appeals court vacated the cellulosic standard because it was unachievable. Cellulose is basically plant-based yard waste (e.g., grass, leaves, twigs).

Other subsidies include a $1 per gallon tax credit for biodiesel (recently extended through the end of 2103). Although there is no assurance it will be extended again, I bet the chances are high given Obama’s support.

I’ve always been hesitant to invest in pure-play renewable-energy companies because their business model relies on government subsidies that can be taken away. Several green energy companies have gone bankrupt, including biodiesel producers such as Inland Empire Oilseeds and Agri-Source Fuels. Academics are concerned that biofuels have been a costly failure so far.

There is one biofuels company that I actually like, and it is attractive precisely because it is not a pure play on biofuels. FutureFuel (NYSE: FF) has a split corporate personality: half traditional chemicals manufacturer and half green-energy biofuels (almost all is currently biodiesel made from vegetable oil and animal fat, but the company is also exploring technologies to produce cellulosic-based fuel):

Source: 10-K Filing (p.2)

Chemicals revenues are not growing while biofuels revenues are increasing rapidly. On the other hand, chemical profit margins are healthy and increasing, whereas biofuels profit margins are unstable and choppy because government subsidies come and go. The biodiesel tax credit expired at the end of 2011, which explains why the profit margin in 2012 was so much lower. However, the tax credit was not only reinstated for 2013, but retroactively applied to 2012 so FutureFuel will be receiving a retroactive $2.5 million tax refund for 2012 during 2013.

Unlike most green-energy companies, FutureFuel has been solidly profitable each year of its existence since it was founded in 2005. It also pays a regular dividend, increased the regular dividend by 10 percent in March, and paid a large special dividend of $1.20 per share at the end of 2012.  The balance sheet is strong with no debt and cash per share of $3.38 represents more than a quarter of the $12.25 stock price.

Fourth-quarter earnings were slightly disappointing with revenue, earnings, and EBITDA all declining year-over-year, but FutureFuel President Lee Mickles was optimistic about 2013:

While our biodiesel business faced significant headwinds in the fourth quarter of 2012, we are optimistic about this segment’s prospects in 2013 as market conditions have improved since yearend. Additionally, we retain a strong pipeline of potential new custom chemical products, which bodes well for the financial future of our chemicals segment.

The stock fell more than 9% on the Q4 earnings news, but remains in an uptrend since last September and is near support at the $12 level. Perhaps because of foreknowledge that the upcoming fourth-quarter report would be poor, in January the company announced that Lee Mickles – who had been CEO since the company’s 2005 founding – was being demoted to President. Chairman of the Board Tony Novelly consolidated his power by adding the CEO title. The management shakeup doesn’t bother me because Novelly has always been the mastermind behind FutureFuel. Mikles’ background is in investment management, whereas Novelly is an oil man who is also CEO of Apex Oil, an energy distribution and storage firm. Novelly owns a massive 40.9% of the company, so his financial interests are well-aligned with the average shareholder. Collectively, FutureFuel insiders own 46.4% of the company (p. 92).

Back in 2005, Novelly founded FF under the name “Viceroy Acquisition Corp.” It was one of those blank-check “special purpose acquisition companies” that didn’t have an existing business but raised $180 million on the London Stock Exchange ($8 per share) in order to buy a business. In 2006, Viceroy acquired an Arkansas-based chemical plant from Eastman Chemical and changed its name to FutureFuel.  

In summary, FutureFuel is a debt-free, dividend-paying, and profitable chemicals company with a biofuels kicker that should do well under the Obama Administration. It is so successful that it ranks 22nd on Forbes Magazine’s 2012 list of America’s Best Small Companies! Trading at a low enterprise value-to-EBITDA ratio of 6.87, the stock deserves a place in the Roadrunner Value Portfolio.

FutureFuel is a buy up to $14; I’m also adding the stock to my Value Portfolio.

Momentum Play: CommVault Systems (Nasdaq: CVLT)

In February’s recommendation of Brocade Communications for the Roadrunner Value Portfolio, I briefly mentioned that Brocade was tangentially involved in the exciting new growth opportunity known as “Big Data.” Well, my recommendation this month for the Roadrunner Momentum Portfolio is CommVault Systems (Nasdaq: CVLT) and it is a software pure-play on Big Data.

The Internet Age has transformed business and human communication. Every year, a larger percentage of business transactions, advertising, and consumer information queries (e.g., Google search) take place online (e.g., eBay and Google search). Social interaction no longer occurs over the telephone or via paper mail, but rather happens on Facebook, Twitter, smartphone mobile texting, and thousands of other Internet websites. Digitized and storable data is increasing at an exponential rate. According to a Microsoft executive:

Sensors, GPS devices, mobile phones, social media, smart cars, roads, bridges, buildings – all produce a steady stream of data just waiting to be examined and cross-examined. In the next five years, we’ll generate more data as humankind than we generated in the previous 5,000 years.

The problem with this data is that 80 percent of it is unstructured and unusable in its raw form. Somehow, the data needs to be organized, stored, and analyzed so that businesses can gain intelligent insights from it. Those companies that can harness the goldmine of business intelligence hidden within the data will be the winners in the corporate rate race. Knowledge is power and profit. This is why General Electric CEO Jeffrey Immelt has called Big Data analytics the “next holy grail” for business.  According to IBM, businesses that utilize data analytics experience much higher returns on investment and higher customer retention than businesses without such intelligence.

CommVault understands that this data overload needs to be managed in order to be useful to business and provides SIMPANA 10 software to harness business intelligence from the data dump:

All this data can be a huge asset, but without a modern management strategy, it can also be a huge liability. With these new paradigm shifts comes an increase in both the amount and complexity of data involved in discovery efforts. In sifting through voluminous Big Data to find responsive information, organizations can spend millions of dollars to isolate relevant Electronically Stored Information (ESI) and even more to review it. Simply put, the Big Data problem brings new meaning to the phrase, “looking for a needle in a haystack.”

Clearly, exponential data growth, diversity of data types and never-ending demands for optimized retention and discovery will create the perfect storm unless companies steer toward a more holistic approach to managing Big Data.

According to market research firm IDC, the market opportunity for Big Data companies is huge:

Worldwide Big Data technology and services market will grow at a 31.7% compound annual growth rate (CAGR) – about seven times the rate of the overall information and communication technology (ICT) market – with revenues reaching $23.8 billion in 2016.

CommVault’s stock price has risen 500% over the past five years and 65% over the past year. Talk about momentum! If IDC’s 3-year growth projection for big data is accurate, there is no reason CommVault cannot continue to outperform. Based on fundamental financial performance, CommVault is hitting on all cylinders. Revenue and earnings per share growth are accelerating:

Source: Morningstar

Its superb financial performance has earned it a 39^th-place ranking on Forbes Magazine’s 2012 list of America’s Best Small Companies! Perhaps even more impressive for a momentum stock, CommVault’s earnings are very stable, with its 5-year EPS ranking in the 10^th percentile (lower is better) and its 3-year EPS ranking even better in the 5^th percentile. As IBD puts it:

Stable earnings give a stock an edge in earnings season. Common sense says stable companies are less likely to miss badly than a company whose earnings are all over the map. Consistency and stability in earnings are found in growth stocks. Stability isn’t just about buying utilities.

CommVault has no debt and insiders own a healthy 7.2% of the company. According to an analyst at Lazard Capital Markets, who has a $95 price target, CommVault has “the best product in the market and it would make a lot of sense for somebody to want to have the asset.” Indeed, CommVault has been rumored to be a takeover target ever since it went public in 2006, but CEO Bob Hammer is confident that the company can get big on its own through organic growth. Fortunately, Hammer is rich enough that he doesn’t need to sell out before CommVault has reached its full potential.

Takeover speculation, however, refuses to go away and recently has spiked in reaction to news that EMC and VMware are planning an IPO for their Big Data spinoff called Pivotal that will become a separate company in April. CommVault’s stock rose 8.5% on the IPO news because it suggests that Big Data is coming of age and will become a must-have capability for large tech firms. 

In summary, CommVault is a debt-free, fast-growing, earnings-stable company with a potential takeover catalyst that should keep this Big-Data pure-play in momentum-mode. The stock is not cheap at a 43.6 EV-to-EBITDA ratio, but momentum stocks never are.  

CommVault Systems is a buy up to $87; I’m also adding the stock to my Momentum Portfolio.