FCStone Is Still Growing!
by: Stone Fox Capital January 20, 2009
Maybe it's the fact that FCStone (FCSX) kinda rhymes with Stone Fox that we've liked this stock since its IPO. Or maybe the fact that it is a commodity risk management company that came public during the great commodity boom. FCSX has generally reported strong results since that IPO but the stock is substantially lower now.
Whether because of the credit crisis and counter party risks or bad debt exposure to clients, FCSX was hit extremely hard in 2008. The once high flying stock dropped from $53 all the way to $1.90. Sounds like a stock with huge growth problems, but the market might be surprised to learn that revenue grew by 16% last quarter YoY. Now how could a stock drop 96% yet still grow revenues? The only answer is FEAR.
In all fairness, the company did report a net loss of $3M in Q4 due to a $25.7M bad debt expense (Call Transcript). Of course that impacted the stock and caused undue FEAR that all of their customers would default leaving FCSX holding the bag. Over 2 months have passed since that original announcement of exposure to bad debt so the market should be a lot more comfortable that the problem was isolated and now contained, then again why is the stock price still in the low $4s.
* Total revenues were $85.6 million in the three months ended November 30, 2008, an increase of 16.3% compared to $73.6 million in the prior year quarter.
* Net loss for the first quarter of $3.0 million, or $0.11 per diluted share, compared to net income of $13.1 million, or $0.45 per diluted share, in the prior year quarter.
* Bad debt provisions totaling $15.6 million, net of tax, or $0.56 per diluted share, in the first quarter 2009.
Netting out this bad debt expense along with other one time gains and losses, FCSX would've earned $.34 in Q4. Very impressive for a company focused on the commodity sector in the midst of a horrible bear market. Yes, that's correct, expectations are for solid profits in 2009.
My concern for a while has been that customers would pull back on commodity trading / hedging if commodities dropped to lower prices. Maybe it will happen if the volatility drops leading to complacency. So far the opposite has happened even with some customers limited by credit lowering their ability to hedge. For now, it appears that the huge swings in prices have sent more customers rushing to risk managers. With many a pundit exclaiming that the commodities will soar again, FCSX is a good bet to gain from the volatility in the market.
After the close on 1/12, FCSX announced the buyout of Elders Risk Management in Australia. This adds yet another cog to the global force that FCSX has developed. In an increasingly global market place, having a global risk management firm will be beneficial to customers. Also, buying when everybody else is selling is very smart as well.
* Elders Risk Management Pty Ltd, an Australian-based company that specializes in risk management for the producers and users of agricultural commodities, including grains, livestock, cotton and wool.
Disclosure: Long FCSX
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