Image Source: Pixabay

As part of an ongoing series, each week we focus on one of the stocks from our stock screeners, and identify why it’s possibly an undervalued gem. The stock this week is:

FutureFuel Corp (FF)

FutureFuel Corp makes and sells diversified chemical products, bio-based fuel products, and specialty chemical products. The company is organized into two segments based on product type: biofuels and chemicals.

The biofuel segment sells biodiesel and other petroleum products. Its fuels are made from a mix of diesel, vegetable oils, and grease feedstock. The chemicals segment sells products that are used in the production of agricultural chemicals, which include herbicides, coatings, and cleaning products, such as detergents.

A quick look at the share price history (as shown below) over the past twelve months illustrates that the price has moved down approximately 4.21%. Note that the metrics and numbers provided below are as of Feb. 6, 2025.

Image Source: Google Finance

One of the metrics we use in our screens is IV/P (Intrinsic Value to Price). Let us simplify what that means. IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay. Here’s how it works:

• The calculation: It adds up the stock’s ability to make money (earning power), grow (incremental growth), and pay back investors (shareholder yield). This gives you an idea of what the stock is really worth, called its implied value.
• The meaning of IV/P: If IV/P is greater than 1, it means you’re getting more value than you’re paying for. For example, for every $1 you invest, you’re getting more than $1 of value. That’s a good deal. If IV/P is less than 1, it means you’re getting less value than you’re paying for. For example, for every $1 you invest, you’re getting less than $1 of value. That might not be a great deal.
• What it’s used for: It’s a quick way to spot undervalued stocks (good deals). If IV/P is very low, like 0.6 (you’re only getting 60 cents of value for $1), it’s likely overpriced. It's important to note that this is just an estimate. Other factors, like market trends or company issues, can affect how accurate this is.

So, IV/P helps investors find stocks that are “cheap” based on how much value they give back. Higher is usually better. We have an IV/P of 2.40 for the company, which means the stock’s implied value is calculated to be 2.40 times greater than its recent price. In simpler terms:

• For every $1 you invest, you would potentially be getting $2.40 of value.
• This is an extremely high ratio, which might suggest the stock could be deeply undervalued, or that there’s some mispricing or unusual calculation in the data.

Possible Reasons for This Undervaluation

FutureFuel Corp may be considered undervalued for several reasons, depending on market conditions, financial performance, and industry trends. Here are some potential reasons why the stock might be undervalued.

Diversified Business Model

• Chemicals and biofuels: FutureFuel operates in both the specialty chemicals and biofuels segments, providing diversification that reduces risk. However, the market may not fully appreciate the value of this dual revenue stream.
• Niche markets: The company’s focus on niche chemical products and renewable fuels should position it well for long-term growth.

Sustainability Trends

• Renewable energy focus: As global demand for renewable energy and sustainable products grows, FutureFuel’s biofuels segment should benefit.
• Environmental regulations: Stricter environmental regulations should increase demand for biofuels and eco-friendly chemicals, boosting FutureFuel’s business.

Limited Analyst Coverage

• Low visibility: FutureFuel is a smaller-cap company with limited analyst coverage, which can lead to undervaluation due to a lack of investor awareness. Stocks with less media and analyst attention often trade below their intrinsic value until they gain broader recognition.

Dividend Yield

• Attractive dividends: FutureFuel has a history of paying dividends.

Market Misunderstandings

• Volatility in biofuels: The biofuels industry can be cyclical and subject to commodity price fluctuations, which may lead to market overreactions and undervaluation during downturns.
• Misunderstanding of business: Investors may misunderstand the company’s dual focus on chemicals and biofuels, leading to undervaluation.

Potential for Growth

• Innovation and R&D: FutureFuel invests in research and development, which should lead to new products or cost efficiencies.

Macroeconomic Factors

• Energy transition: As the world transitions to cleaner energy sources, FutureFuel’s biofuels segment should see increased demand.
• Inflation hedge: Companies with strong pricing power, like FutureFuel, should perform well in inflationary environments, but this advantage may be overlooked.

Historical Performance

• Consistent performance: FutureFuel has a track record of consistent performance, but its stock price may not fully reflect its historical stability and resilience.

Risks to Consider

While FutureFuel appears to be undervalued, investors should also consider potential risks, such as:

• Dependence on government subsidies for biofuels.
• Volatility in commodity prices (e.g., oil, corn, and soybeans).
• Regulatory changes impacting the biofuels or chemicals industries.

In summary, FutureFuel Corp may be undervalued due to its strong financials, diversified business model, and growth potential in renewable energy, combined with limited market visibility and mispricing relative to its fundamentals. The company has an Acquirer’s Multiple of 5.30, and a FCF Yield of 17.80%.

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