Thursday, September 17, 2020

Friedman Industries

While a certain sector of the market does seem overheated, I'm finding plenty of value opportunities around. Much of the market is still behaving like one in recession, and that's probably a good place to invest for the long term. One example is Friedman Industries (FRD), a steel processor.

It's generally a profitable company over the years, though its returns on capital are not going to blow anybody away. Its profits do fluctuate quite a bit, as it buys steel, whose prices can fluctuate, leading to margins that lag as they try to pass on or deal with price increases/decreases. Lately, profits have been negative, which likely comes as a surprise to no one. But I see no reason why normalcy won't eventually return to this industry.

The company has net current assets of $53 million and yet trades for just $41 million. As recently as 2019, the company earned operating income of $8 million. Net cash is $14 million, so the company is likely to be able to ride out these slow times for as long as necessary. Book value is $66 million.

Insider activity has been positive as well, with the company's current CEO having recently picked up some shares in the open market.

The downside here is pretty well protected, considering the company's cash and inventory positions relative to its trading price, as well as the balance sheet strength. The upside potential here also looks good should things eventually return to normal. As such, I believe FRD to be an asymmetric bet worth making.

Disclosure: Author has a long position in shares of FRD


Anonymous said...

Commenting as anonymous, as I am afraid of spam.

First of all, thanks for the article! The company looks interesting, but I am concerned that it is only down 3% YoY. In such a cyclical business this is nothing - going hold here would be similar to betting that covid is going to go away soon.

Also note that the CEO has only bought like 75k$ worth of stock at above $5. I would say that is not a strong signal at all.


Hey Barel,
Interested in a company which just bought back about 20% of its shares this year?
And is on track to buy around 15% of it’s current market cap?
Maybe with the chairman/27% plus holder buying his own shares since January?
What if it’s a platform with user data on 110 million registered users?
With a Ttm P/E ratio of 2?

Would you be interested to take a look?