Why we see big risk – and big reward – in this clean technology stock

Benj Gallander, Ben Stadelmann, and Philip MacKellar
March 8, 2022

All right, first let us address that this company, Fuel Tech, Inc., will be too risky for most investors, or is it speculators? After all, the enterprise has lost money for seven straight years and less than two years ago it almost lost compliance with its Nasdaq listing. Revenues have been in a continuous downtrend for years, and except for a brief blip above $5 at the end of 2020, the stock price has done virtually nothing since it was above $34 in 2007 except tumble. Did Benj lose it when he purchased this one in January from $1.21 – $1.26? As usual, time will tell.

One reason that Benj likes this corporation is the field where it works, as its primary business is controlling the pollution of utilities and industrial customers, along with pulp and paper operations and even universities. Yup, reducing nitrogen oxide emissions from boilers, furnaces, incinerators, and other combustion sources is an important pursuit and this field should grow. In addition, lowering greenhouse gases by lessening air pollutants like acid emissions and mercury is a hot space now. But will FTEK grab enough business to be profitable? Aye, there is the rub.

The key management of the enterprise have been hanging their hats at this Warrenville, Illinois based enterprise since at least 2017, 30 years after the enterprise was created. On the one hand, this sounds great, a deep experienced team that knows the operation well. But on the other hand, the cynical one that we maintain for all investments one must wonder why the firm has not done better? Certainly, part of it is that the Chinese competition “ate their lunch” causing FTEK to close their operations there in 2019 after years of touting it as their saviour.

One primary risk for FTEK is coal power utilization continues to decline, obviating the need for their tech, which is a key reason that revenue has shrunk so much. That will continue to be a challenge.

Certainly, management knows how to be nimble. When the stock jumped from $0.70 to over $5.00 in the aforementioned leap, the top brass quickly went to the market to raise cash. The reason for the stock runup was the backlog jumping, revenues increasing by 25 per cent and the bottom line was black to the tune of $2.4 million, Note though, that was largely due to a $2.6 million insurance settlement, otherwise there would have been the usual loss. Still the market bought in, and shares and warrants were quickly sold at $5.16, with the tally arriving in the bank being $25.8 million before agent’s fees and the usual offering expenses. Even with the regular losses, there remains more than $35 million in the kitty. That helps to diminish risk going forward while the company attempts to pull itself up by the bootstraps.

It seems to be happening. While revenues dipped last quarter from $8.2 million to $7.6 million there was a tad of black ink to the tune of $0.7 million. The pro forma for future revenues has been boosted from $40 – $50 million to $50 million – 75 million. Though management is sometimes overly optimistic, even hitting the bottom of this range would be a step in the right direction. And here is the cherry on the soufflé – the corporation has $0 debt. Between the cash in the bank and zero need to appease creditors, risk is mitigated.

Choosing Fuel Tech’s initial sell target, the reward side of the equation, is not as simple as usual since the stock price has been beaten down for so long. And though we hate to admit it, predicting a potential exit price is an inexact “science” at the best of times. Still, we always like setting a goal as that grounds us, taking some emotion out of the sell decision. $4.84 has been chosen.

When doing this exercise, followers often ask, “How long until you expect to reach the target?” A timeline is never set. If it works, a gain of about 290 per cent would be notched, so even if it takes 10 years, that would still be fabulous and very tax efficient. However, there is a reasonable possibility that this could be achieved in five years or less. So much the better if it happens. Of course, it could prove to be pie-in-the-proverbial sky, albeit naturally Benj thinks not.

One macro risk for this enterprise is the overall stock markets. Though they have pulled back from their highs, they appear from this angle to still be elevated. It will be hard for most companies to do well if a major drop occurs.