Fuel Tech (FTEK) is a company with a long history and a well-established trading past on the stock exchange but has seen a sudden upsurge in interest from brokers and investors in more recent times. This update looks at the fundamentals of the business and the profit model of the company as well as the most recent news and events surrounding it. By doing so, the reasons for the sudden upsurge in the stock price of the company which last traded at $8.75, a buy value which represents close to a 50% uptick in the last 4-6 weeks of trading.
The Business Model
Fuel Tech was put together as a firm in the late 80’s with the aim of creating products which would be applied to boilers and other pollution emitting nodes. The goal was to contribute to effective pollution reduction by industrial emitters such as utilities and manufacturing plants by making the processes involved more efficient. There are also divisions which now deal directly with efficiency, notably the Fuel Chem product suite which are a broad based effort to improve the operating life of high energy combustion and energy units by contributing to their more effective operation and reliability.
The company is essentially a developer and retailer, with a research and development team required to create and fine tune products and services that serve the companies core aims to a high standard. The retail side flows from this in the form of contract wins and the provision of services and products to clients, driven by the sales team that markets the work of the research division. The company operates in several segments, meaning that the opportunity of cross-selling and up-selling also exists.
The Recent News
The recent surge in interest and the share price was in large part, if not exclusively, driven by the announcement of the third quarter results. Revenue growth was over 30%, an outstanding result for an established company and a signal of a strong renewed sales and marketing effort. Another important indicator, net income, almost tripled as well, which was a pleasing result. The impressive numbers were driven by a large contract signed to reduce air pollution in South America, which contributed almost half of the increase in that segment. The remainder was made up of a number of smaller projects from the domestic sector from aging infrastructure and public authorities keen to squeeze extra productivity dividends from their existing assets.
Industry and Company Outlook
The outlook for the company as a result of the recent announcements is bright. As more utility providers and decision making bodies encounter the products and services that Fuel Tech (FTEK) offers, the opportunity to cross-market and cross-sell across other geographical locations is opened up. The cash reserves accumulated also give the opportunity to develop stronger products to supplement the additional product offering. However, the strategic direction as guided by the CEO at the results announcement suggest a doubling down on sales and marketing efforts.
This is a viable strategy, as those efforts look to build on the success of the South American project by landing higher value contracts overseas. The focus of the effort will be China, where anecdotal evidence suggests that 2 power plants are built every week in order to fuel the rapidly growing urban population.
The outlook for the industry are also strong as major polluters and emitters of pollution such as China’s major cities are being forced to look at reduction measures. The experience of the developing world strongly mirrors the experience of the United States in earlier decades with air quality, acid rain and waterway degradation as a result of “dirty” emissions into the atmosphere an extremely pressing concern for citizens and governments. The company is also poised to benefit from the energy targets set by governments and inter-governmental organizations to reduce emissions. This is because mitigating existing pollution is a far more economically viable solution than building brand new infrastructure and incredibly costly “green” projects as sources of energy that cannot sufficiently address the energy shortfall that would occur if all existing infrastructure was taken offline.
There is also an intriguing opportunity / threat scenario at play. On one hand, energy majors and global engineering and chemical companies are all operating alongside or in the same space as Fuel Tech to reduce total emissions and increase efficiency. This would provide a strong disincentive to invest in Fuel Tech as the competition from a virtually limitless capital expenditure and research budget would provide a strong threat. However, there is also the potential for one of the very same companies to identify Fuel Tech as a attractive company for acquisition based on their accumulated knowledge and expertise.
Fuel Tech is an incredibly interesting company creating innovative products to serve a very real and pressing need. The most attractive elements of the company are the truly global potential of the market, though risks exist in implementation of contracts and effectively marketing and selling the products they create well enough to gain a foothold in this market. The recent results suggest momentum is being built and strong expertise gained, however, those considering an investment should also be mindful of the news flow from the company to keep an eye on any changes in this positive trend.