|
|
Profit From Commodity Risk With FCStone
Posted: Nov 26, 2007 11:07 AM by Wayne Pinsent
Commodity prices are surging, and this has hit some companies hard. Fore example, much of the recent trouble experienced by ethanol producers can be attributed to the rising price of corn.
The commodity surge is not dying down, and demand is increasing to manage commodity price risk. That is where FCStone Group (Nasdaq:FCSX) enters the picture. The Kansas City-based commodity risk manager went public earlier this year and has doubled since its IPO.
Strong Demand
FCStone is a commodity-risk-management company that serves all companies that use commodities, from producers to end-users. The company covers agriculture, energy, food, livestock, and renewable fuels among other things. FCStone provides analysis and hedging solutions, which allow a company with commodity exposure to reduce the risk of rising costs to its bottom line.
Several airlines went out of business when they were crippled by exploding energy costs. Companies such as Delta Airlines (NYSE:DAL), Northwest (NYSE:NWA) and United Airlines (Nasdaq:UAUA) got pinched because they couldn't manage the rising costs of fuel. None of those companies were able to anticipate and implement effective risk management solutions. Needless to say, we are in the midst of a commodity bull market. The demand for these services provided by a commodity expert like FCStone is strong and will likely continue to be so.
The Results Are In
This month, the company reported net income of $12 million, or diluted earnings per share of 42 cents. This blew away analyst expectations of 23 cents per share, and was 133% higher than the 18 cents per share reported for its fourth quarter of 2006. The company improved significantly on the top line as well, with revenues of $75.6 million representing a more than 40% increase from the same quarter last year. (To read the full earnings release, click here.)
The annual results were just as impressive, with earnings per share that jumped 85% to $1.30 in 2007 from 70 cents in 2006. Management cited unprecedented market volatility and rapid expansion in the renewable services industry as causes for the company's surprising quarter and year.
Best (and Only?) Choice In The Field
The stock is trading at roughly 30-times trailing earnings, which, when factoring in its performance, is fairly cheap. This is perhaps the only true commodity-risk-management pure-play company that is public. Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and other public companies provide these services as a small part of their overall businesses. The companies that have a comparable focus to FCStone are typically private, such as ADM Investor Services, a subsidiary of Archer Daniels Midland (NYSE:ADM).
It is hard to look for solid comparisons, but FCStone is clearly proving itself. I think volatility will remain in the commodity markets for quite some time, with an emphasis on continuing upward price pressures. FCStone is in a great position to continue to benefit from this and expand its business.
The Bottom Line
Many companies today need to hedge their exposure to commodity prices. The rising costs are not something that can be ignored, and this is where FCStone is stepping up to the plate. This stock has a great chance to benefit from the high risk-management demand surrounding commodities.
For added insight, check out Who sets the price of commodities? and Commodities: The Portfolio Hedge.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
Rate this Article:
Your Rating:
Overall Rating:
Vote Now!
MORE STOCK ANALYSIS
 Loading...
THE BEST OF INVESTOPEDIA
Loading...
|
CURRENT HIGH YIELD SAVINGS RATES
Rate data provided by
|
