Fuel Tech: A Small Play on a Big Pollution Market

In a world that is increasingly focused on curbing carbon emissions and limiting air pollution, Fuel Tech (NASDAQ:FTEK) is one company that clearly has an expanding market opportunity. The recent sandstorm in China has also put the spotlight on global air quality and reinforced the need for clean energy innovators like Fuel Tech.

However, as a micro-cap stock with a capitalization of less than $100 million, Fuel Tech is a small fish in an industry filled with many large players. But this doesn't mean it can't carve out its niche and grow into a nice investment. Let's take a closer look at Fuel Tech's business, recent performance, and growth prospects around pollution control.

What Does Fuel Tech Do?

Illinois-based Fuel Tech operates under three segments—Air Pollution Control (APC) and Chemical Technologies, and Water Technologies. The core APC business makes and installs emission control systems that limit the release of different pollutants from factories and manufacturing plants. Fuel Tech has deployed more than 1,200 APC systems globally and offers customers ongoing support to maintain the technology's performance.

Fuel Tech offers a wide range of products, but its customized nitrogen oxide systems are said to reduce harmful emissions by as much as 80%. The systems are installed for a range of customers including those in the utility, industrial, and municipal waste sectors.

Various manufacturing processes including chemical and pharmaceutical production are known to pollute the air with hazardous fumes that impact human, animal, and plant life. According to Stratview Research, the global air pollution control equipment market will grow steadily over the next five years and top $10 billion by 2025. This is good news for the environment—and for companies like Fuel Tech.

In addition to several U.S. offices, Fuel Tech has a presence in Italy and China. Its Beijing operation is particularly important because the Asia-Pacific region is the world's largest and fastest-growing market for air pollution control equipment. As one of the largest producers of automobiles, tires, chemicals, and cement, China is an especially big source of demand. More strict Chinese government policies related to industrial air pollution are expected to put greater pressure on companies there to implement advanced APC systems like those offered by Fuel Tech.

How Were Fuel Tech's Fourth Quarter Results?

After the close on March 15^th, Fuel Tech reported that revenues grew 27% for the second straight quarter to $6.2 million. This fell short of the analyst consensus of $6.9 million. The Street was banking on an improvement in COVID-19 challenges and a better industrial economy leading to an acceleration in sales growth. A net loss of $0.07 per share marked a 30% year-over-year improvement but also missed expectations by two cents.

The top-line growth was solid all things considered. The impact of pandemic uncertainty on industrial purchasing activity limited opportunities in the core APC business throughout most of the year and that trend persisted in the recent quarter. Still, Fuel Tech exited the year with a global sales pipeline of about $45 million which is a good starting point for a new year that is expected to see improved economic activity.

Despite the mildly disappointing Q4 results, management struck an upbeat tone on the company's 2021 prospects. With a balance sheet that now has an increased cash position of $37 million and contains no debt, Fuel Tech has its sights set on investing in growth opportunities in its core APC system business and accelerating its move into the growing water treatment solutions market.

Is Fuel Tech Stock a Buy?

Almost 15 years ago Fuel Tech shares traded in the 30's before going on a prolonged downturn into single digit territory. However, after the huge volume swing of November 2020, it may be getting a second wind. This burst came on the heels of the company's impressive third-quarter results that handily beat the Street on the top and bottom line. But although revenue growth of 27% was convincing, the better-than-expected profitability was driven by a one-time settlement gain.

Since then, the market has largely forgotten about this outperformance as the stock has pulled back with the rest of the market. Last month's closing of a $25.8 million private placement has also weighed on the recent downtrend.

But the pullback is good news for investors. Although the fourth quarter report wasn't of the blowout variety this time around, Fuel Tech has a healthy order backlog and a long-term growth opportunity that hasn't changed. As countries continue to enforce clean energy policies, demand for APC technology and service will be in high demand. Fuel Tech will have chances to capitalize on this environment.

To say the least, Fuel Tech is a speculative investment that only investors with a high-risk tolerance should consider. With this said, as far as smaller industrial recovery plays go, this stock is among the most compelling.