FRIEDMAN INDUSTRIES INC FRD
May 21, 2013 - 8:20am EST by
chris815
2013 2014
Price: 9.80 EPS $1.04 $1.75
Shares Out. (in M): 7 P/E 9.4x 5.6x
Market Cap (in $M): 66 P/FCF 11.0x 7.0x
Net Debt (in $M): 0 EBIT 10 0
TEV ($): 50 TEV/EBIT 5.0x 0.0x

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  • Steel
  • Cyclical

Description

 

FRD is a steel service center which operates in two segments:

 

Coil Products: they purchase hot-rolled steel coils from Nucor and process the coils into flat, finished sheet and plate products.  They sell the sheet and (through their direct sales force) to manufacturers in the South Eastern U.S.  This segment has a facility in Hickman, AK and another in Decatur, AL; the Decatur facility was completed in 2008 (its essentially new).

 

Tubular Products: they make American Petroleum Institute (API) line pipe and API oil country pipe.  This is pipe used in oil and gas wells as well as for oil and gas pipelines. They buy the raw material for this pipe from United States Steel (Lonestar, TX plant) and sell about a quarter of their tubular products back to United States Steel.

 

At $9.80 per share, FRD is trading at 1.1x tangible book value, 5.1x trailing EBITDA and 10.2x trailing earnings.  We think this is a bargain, especially in view of the following observations:

 

  1. FRD generates respectable returns on capital, e.g., they will produce a 10.5% ROE this year with an unlevered balance sheet.

 

  1. Their coil business represents about half of this year’s revenue but only 8% of this year’s EBIT.

 

  1. Their tubular business (making API line pipe and API oil country pipe) is likely to remain strong in coming years owing to pipe requirements for producing and transporting oil and gas from U.S. shale plays.  (About 92% of this year’s EBIT is from this segment).  

 

  1. At some point, their coil business is likely to rebound, but we are not asked to pay for this rebound.

 

The following table summarizes FRD’s current capital structure and valuation:

 

(000 except share price)

 

Shares outstanding, 12/31/2012

 6,799

Options outstanding, 12/31/2012

 -  

diluted share count

 6,799

Share price, 5/20/2013

 9.80

Market capitalization

 66,635

Cash, 12/31/2012

 16,603

Operating lease obligations, 3/31/12

 212

Debt, 12/31/2012

 -  

Enterprise value, net

 50,244

 

 

 

 

Note that they have no debt and no outstanding stock options. The following table summarizes FRD’s capital returns since 1996.

 

EBITDA /

EBIT /

Earnings /

Earnings /

 

assets

(assets - CL+ST debt)

assets

equity

9 ME 12/31/12

14.1%

15.2%

9.3%

10.5%

12 ME 3/31/2012

17.8%

18.7%

10.4%

12.9%

12 ME 3/31/2011

20.0%

20.1%

11.7%

13.9%

12 ME 3/31/2010

4.6%

1.9%

1.0%

1.2%

12 ME 3/31/2009

37.2%

36.3%

22.6%

24.4%

12 ME 3/31/2008

11.7%

12.8%

6.7%

9.9%

12 ME 3/31/2007

15.9%

22.2%

8.7%

13.5%

12 ME 3/31/2006

19.2%

26.1%

11.5%

17.4%

12 ME 3/31/2005

21.7%

28.2%

12.3%

17.7%

12 ME 3/31/2004

10.3%

11.5%

5.5%

7.7%

12 ME 3/31/2003

7.2%

6.7%

3.3%

4.6%

12 ME 3/31/2002

5.7%

5.0%

2.1%

3.1%

12 ME 3/31/2001

12.3%

13.9%

6.1%

9.6%

12 ME 3/31/2000

11.6%

11.6%

5.6%

8.8%

12 ME 3/31/1999

15.4%

16.9%

8.6%

12.9%

12 ME 3/31/1998

18.1%

24.1%

10.4%

18.7%

12 ME 3/31/1997

17.2%

21.8%

9.5%

15.9%

12 ME 3/31/1996

16.6%

18.9%

8.6%

13.9%

         

mean

15.4%

17.3%

8.6%

12.0%

median

15.7%

17.8%

8.7%

12.9%

 

 

Here is a summary of FRD’s cash flows since 2002.

 

 

Cash from

     

Delta

Delta

Dividends

 

(000)

Operations

 

Capex, net

 

 debt

 equity

paid

Total

9 ME 12/31/12

11,243

 

(424)

     

(6,052)

(6,052)

12 ME 3/31/12

8,452

 

(320)

     

(3,400)

(3,400)

12 ME 3/31/11

(6,986)

 

515

 

(14)

 

(5,032)

(5,045)

12 ME 3/31/10

4,099

 

(374)

 

(54)

 

(680)

(734)

12 ME 3/31/09

25,464

 

(2,002)

 

(6,654)

 

(2,516)

(9,170)

12 ME 3/31/08

1,190

 

(4,439)

 

6,722

203

(2,019)

4,906

12 ME 3/31/07

6,805

 

(5,521)

   

106

(2,271)

(2,165)

12 ME 3/31/06

8,539

 

(1,963)

 

(3)

(2,458)

(2,291)

(4,752)

12 ME 3/31/05

2,476

 

(953)

 

(60)

(2,282)

(1,703)

(4,045)

12 ME 3/31/04

3,028

 

(821)

 

(63)

6

(757)

(814)

12 ME 3/31/03

148

 

(605)

 

(2,762)

5

(606)

(3,362)

 

64,457

 

(16,907)

 

(2,887)

(4,419)

(27,326)

(34,632)

 

Note that the company consistently generates positive cash from operations (2011 being the exception) and returns a large portion of its excess cash flow to shareholders. Between 2003 – 2012, FRD’s tangible book value doubled (from $31.2 million to $62.2 million).  

 

The following table summarizes FRD’s revenue and EBIT by segment since 2006.

 

(000)

9 ME 12/31/12

FY 2012

FY 2011

FY 2010

FY 2009

FY 2008

FY 2007

Revenue

             
 

Coil

49,188

69,198

62,030

36,359

73,244

83,089

96,795

 

Tubular

55,301

92,324

69,679

28,773

135,536

95,696

102,932

   

104,489

161,522

131,709

65,132

208,780

178,785

199,727

Operating profit

             
 

Coil

732

186

1,368

(841)

483

2,782

4,202

 

Tubular

8,437

14,581

13,392

3,728

23,119

6,284

7,864

   

9,169

14,766

14,760

2,887

23,601

9,066

12,067

Assets

             
 

Coil

24,575

26,260

25,150

20,377

22,791

29,469

27,601

 

Tubular

26,887

39,446

36,334

24,006

18,703

34,041

34,491

 

Corporate

18,263

12,865

8,100

 

 

 

 

   

69,725

78,570

69,584

44,383

41,494

63,510

62,092

Capex

             
 

Coil

 

250

25

188

1,640

3,862

5,647

 

Tubular

 

36

491

186

362

577

1,259

 

Corporate

 

36

 

 

 

 

 

   

0

321

515

374

2,002

4,439

6,906

 

Note that the Coil segment has deteriorated since 2007.  At some point, demand for coil products is likely to rebound. In the meantime, we can buy this business at a reasonable price based only on its tubular segment, i.e., we get the coil business for nothing.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Eventual improvement in the economy.
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