In January 2021, I wrote a bearish article on SA about air pollution control technologies supplier Fuel Tech (NASDAQ:FTEK) in which I said that the business of the company shouldn’t be worth more than $20 million. Since then, the share price of Fuel Tech has fallen by 79% and the company is valued at $41.8 million as of the time of writing. I think that this has been a good short selling idea that has exhausted its potential. Fuel Tech seems to be in a better market position today and its enterprise value is close to becoming negative thanks to over $35 million in the bank. I now view the company as a speculative buy.
Overview of the business and financials
In case you haven’t read my first article on the company, here’s a quick overview. Fuel Tech is involved in the development and application of multi-pollutant emissions control and water treatment technologies and its three platforms include Air Pollution Control, FuelChem, and Dissolved Gas Infusion. Air Pollution Control (APC) includes solutions for nitrogen oxide reduction and particulate control technologies and many of the clients include coal and natural gas plants. FuelChem, in turn, includes chemical injection programs aimed at improving the efficiency of combustion source energy plants. Dissolved Gas Infusion (DGI) is a water treatment technology that utilizes a patented nozzle to deliver supersaturated oxygen solutions and other gas-water combinations to target process applications or environmental issues. It’s aimed at the water and wastewater industries with the goal of reducing energy consumption, installation costs, and operating costs while improving treatment performance.
Fuel Tech has several blue-chip clients and has completed over 1,200 installations across 26 countries worldwide. However, about 80% of its revenues come from the USA. Also, about 75% of revenues come from natural gas projects.
Looking at the financials of the business, breakeven annual revenue is around $25-30 million depending on the product segment mix. The company says that it’s pursuing a global sales pipeline of $50-75 million.
I think that 2021 was a good year for Fuel Tech as revenues rose by 7.6% to $24.3 million and the company was profitable for the first time since 2013. However, it has to be noted that there was $1.57 million in other income that included the forgiveness of a Paycheck Protection Program loan. FuelChem revenues rose by 24% to $17.4 million while APC revenues booked a 19% decline to $6.9 million due to the timing of project execution and new orders.
Turning out attention to the balance sheet, I think things look good as Fuel Tech has no debts, and there were $35.9 million in cash and cash equivalents as of December 2021. The vast majority of these funds come from a $25.8 million private placement from February 2021 when the company decided to take advantage of its unexpectedly high share price.
As you can see from the table above, Fuel Tech has an asset-light business model and cash now accounts for the bulk of its assets. The enterprise value of the company stands at just $5.87 million as of the time of writing and $4.98 million if you count restricted cash too. The management of Fuel Tech has no plans for share buybacks at the moment, so investors have to look towards a continued improvement in the fundamentals of the business to drive an increase in the market valuation.
Looking at the future performance of the business, I expect APC and FuelChem revenues this year to be in the range of $24-26 million and it will be interesting to see how successful the company will be in commercializing its DGI technology. In 2021, Fuel Tech completed demonstrations of this technology at three locations in the USA and commercialization is being targeted for late 2022. It would be good to see Fuel Tech develop another stream of revenues in a year or two.
Overall, I think that Fuel Tech is on the right track and that it’s starting to look cheap due to its high cash position. The company’s revenues are growing and it has managed to significantly decrease selling, general and administrative expenses. I rate it as a speculative buy as the business still isn’t profitable and there are significant risks for the bull case. It’s possible that the company doesn’t manage to further increase revenues over the next few years which means that the business could continue to slowly bleed money. Fuel Tech is still far away from its glory days in 2008 when it had annual revenues of over $80 million. There is significant concentration risk too as 67% of revenues of net revenues in 2021 were attributable to just 5 customers. The loss of any one of them is something the company can’t afford.
Fuel Tech finished 2021 with a strong balance sheet as it completed a $25.8 million private placement shortly after my first article on the company came out. I think that the company has done a good job of slashing costs and it’s now close to breakeven.
I’m putting Fuel Tech on my shortlist and I want to see it post at least two consecutive quarterly net profits before I consider investing in it. Selling, general, and administrative expenses are forecast to come in at $12-12.5 million in 2022 which means that increasing revenues is crucial for profitability. Especially considering that gross margins are expected to be a bit lower than in 2021.
In my view, Fuel Tech is on the right track, but it still has some way to go. Investing in turnaround stories can be dangerous so it could be best for risk-averse investors to avoid this one.