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Praveen Chawla
Praveen Chawla
Articles (46) 

Investment Note: Friedman Industries

A debt-free steel value-added reseller selling at rock bottom price

April 28, 2020

Friedman Industries Inc. (FRD) is a small stock, with a market cap of only $30.03 million. The Lone Star, Texas-based value-added reseller of steel products is currently selling for 55% of its net asset value.

Friiedman operates in two reportable segments; coil products and tubular products. It has three plants in the U.S., all fully owned by the company. The Flat Roll Division operates hot rolled coil processing facilities in Hickman, Arkansas and Decatur, Alabama. The Tubular Division is located in Lone Star, Texas and operates under the trade name Texas Tubular Products. Texas Tubular maintains an extensive stock of new mill reject / new secondary pipe and also operates a pipe finishing facility that is focused on threading oil country tubular goods with semi-premium connections.

The properties are carried on the books at cost, which I find to be understated.

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Source: 2019 10-K.

A look at the following chart indicates that the stock is selling at its lowest price-book multiple in 20 years.

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Source: Gurufocus.com

The company has working capital of about 56 million. Out of this, over 20 million is cash. The company has no debt.

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Source: Author

There has been recent Insider buying by the CEO and Directors of the company, indicating that the stock is potentially undervalued. Over this same time frame, there were no significant insider sells.

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Source: Gurufocus.com

In my opinion, Friedman Industries is trading at an unreasonably low price level, which is the exact kind of opportunity that value investors look for. Sooner rather than later, temporary adverse influences will wane and the stock price will likely grow over time. The possibility of permanent capital loss on this investment is small, given the debt-free and cash-rich balance sheet.

Once you strip out the cash, you are basically paying less the $10 million for an operating business that has already paid out a cumulative dividend of $38 million over the last 20 years. In addition, the company has retained earnings of $40 million and bought back stock worth $5 million.

Friedman produced normalized annual earnings of $0.54 per share over several business cycles. There has not been much earnings growth, and earnings are very cyclical.

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Plugging this into the Gurufocus DCF calculator, assuming no growth of earnings and a 3% discount rate, the model produces a fair value of $8.03. I think this is a fair valuation and hope to see this price within two to three years.

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Disclosure: The author owns the stock.

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