Friedman Industries, Inc.
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Measured Approach FRIEDMAN INDUSTRIES (AMEX:FRD) Industry: Construction – Supplies and Fixture
Current Price Market Cap ($M) Shares Outstanding (M) Institutional Holdings % Insider Holdings % Beta Latest Quarter Reported
Data as of: 10/23/2009
Current Data $5.83 PEG $39.64 EPS TTM ($) 6.8 P/E TTM 32.4 EPS Estimated 2009 ($) 8.8 P/Estimated EPS 1.62 MA Value ($) 06/09 Price Value Ratio
0.13 1.40 4.2 NA NA $9.79 59.6%
Friedman Industries, Incorporated is engaged in steel processing, pipe manufacturing and processing, and steel and pipe distribution. The Company has two product groups: coil and tubular products. The Company sells coil products to approximately 170 customers located primarily in the mid-western, southwestern and southeastern sections of the United States. Its principal customers for coil products and services are steel distributors and customers fabricating steel products, such as storage tanks, steel buildings, farm machinery and equipment, construction equipment, transportation equipment, conveyors and other similar products. During the fiscal year ended March 31, 2009 (fiscal 2009), 17 customers of coil products, accounted for approximately 25% of the Company's sales. The Company's principal customers for tubular products are steel and pipe distributors, piling contractors and U.S. Steel Tubular Products, Inc. (USS). HIGHLIGHTS
Friedman Industries is one of those rare occurrences a company that is selling at near net asset value. For the quarter ending 06/09, the company reported current assets of $43.9 million and total liabilities of $5.6 million. Inventory to Sales was 9.29% at the end of FY09. For the trailing 12 months, the Inventory to Sales ratio increased to 10.41% The EPS growth rate for the trailing 12 months is 38.2%. The three and five year growth rates are 30.2% and 43.5% respectively. FRD has a current ratio of 9.5 and no long term debt. This indicates that the company is financially secure. It is also indicative of a company that may not be putting its assets to the best use. Certainly, the company has room to employ some debt. The company has a Price/Sales ratio of 0.2 based on trailing 12 month sales. This is very favorable.
ANALYSIS OF THE BALANCE SHEET The schedule presented below shows the year-end balance sheets for the years between March 31, 2005 and March 31, 2009. We also show the balance sheet as of June 30, 2009. Cash comprises 50% of the business’s current assets as of June 23, 2009 as compared to 39.6% on March 31, 2009. Inventory comprises 38.3% of the current assets on June 30, 2009 as compared to 45.4% on March 31, 2009. Fixed assets include all of the company’s production machinery and equipment. As of June 30, 2009, Net Property, Plant and Equipment made up 95.4% of non-current assets.
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Overall, the business’s total assets increased approximately 20.9% during the period March 31, 2005 to June 30, 2009. The increase in total assets has been due primarily to increases in cash. During the same period, accounts receivable decreased significantly as did inventory. Accounts payable comprise the largest segment of current liabilities at 78.3%. Accounts payable have decreased dramatically over the past five years, in line with the decrease in accounts receivable. The company reports no long term debt and carries no off-balance sheet liabilities. Balance Sheet (Amounts in Millions) Assets Cash ST Investments Accounts Receivable Inventory Other Current Assets Total Current Assets Net Property,Plant & Equip. LT Investments Goodwill/Intangibles Other LT Assets Total Assets
TTM 06/60/09 21.9 0.0 3.8 16.8 1.4 43.9 16.7 0.0 0.0 0.8 61.4
FYE 03/31/09 16.9 0.0 5.0 19.4 1.4 42.7 17.0 0.0 0.0 0.8 60.5
FYE 03/31/08 2.6 0.0 16.7 29.9 0.1 49.4 16.8 0.0 0.0 0.8 67.0
FYE 03/31/07 1.0 0.0 17.3 33.3 0.2 51.7 13.5 0.0 0.0 0.7 65.9
FYE 03/31/06 2.0 0.0 17.5 28.0 0.1 47.6 7.8 0.0 0.0 0.6 55.9
FYE 03/31/05 0.2 0.0 16.4 25.9 1.0 43.5 6.7 0.0 0.0 0.6 50.8
3.6 0.1 1.0 4.6 0.0 1.0 5.6 0.0 55.7 61.3
2.7 0.1 0.6 3.4 0.0 1.0 4.3 0.0 56.1 60.4
13.5 0.1 1.2 14.8 6.7 0.6 22.0 0.0 45.0 67.0
21.9 0.0 1.4 23.3 0.0 0.5 23.8 0.0 42.1 65.9
16.7 0.0 1.7 18.4 0.0 0.5 18.8 0.0 37.1 55.9
13.5 0.0 1.5 15.0 0.0 0.5 15.4 0.0 35.4 50.8
Liabilities Accounts Payable Short Term Debt Other Current Liabilities Total Current Liabilities LT Debt Other LT Liabilities Total Liabilities Preferred Stock Common Stock Equity Total Liabilities & Equity
ANALYSIS OF THE INCOME STATEMENT Presented below are the income statements for the five year period March 31, 2005 to March 31, 2009 and for the twelve month period ending June 30, 2009. Until 2009, revenues increased steadily from $$188.0 million in FY05 to $208.8 million in FY09. Revenue growth has been 16.8%, 4.7% and 12.4% on a one year, three year and five year basis. As of June 2009, revenue declined 14.1% year-over-year. Operating expenses have been highly variable over the period being examined. In the 12 month period ending 06/09, operating expenses have decreased to $147.2 million or 91.2% of sales as compared to FY08 when operating expenses totaled $172.2 million or 96.3% of sales. Operating expenses were higher in FY07 on higher sales.
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Income Statement Amounts in Millions
Sales Cost of Goods Sold Gross Income Depreciation & Amortization Research/Development Interest Expense Unusual Expenses/(Income) Total Operating Expenses Operating Income Interest Expense - Non-Op. Other Expenses/(Income) Pretax Income Income Taxes Income After Taxes Adjustments to Income Income for Primary EPS Nonrecurring Items Net Income
TTM 06/60/09 161.4 142.2 19.2 n/a n/a 0.0 n/a 147.2 14.3 n/a (0.1) 14.4 4.9 9.5 0.0 9.5 0.0 9.5
FYE 03/31/09 208.8 182.1 26.7 n/a n/a 0.0 n/a 188.1 20.7 n/a (0.1) 20.8 7.1 13.7 0.0 13.7 0.0 13.7
FYE 03/31/08 178.8 167.3 11.5 n/a n/a 0.1 n/a 172.2 6.6 n/a (0.2) 6.8 2.3 4.5 0.0 4.5 0.0 4.5
FYE 03/31/07 199.7 185.1 14.6 n/a n/a 0.0 n/a 189.0 10.7 n/a (0.2) 10.9 3.9 7.0 0.0 7.0 0.0 7.0
FYE 03/31/06 181.9 166.8 15.1 n/a n/a 0.0 n/a 172.1 9.8 n/a (0.3) 10.1 3.6 6.5 0.0 6.5 0.0 6.5
FYE 03/31/05 188.0 172.3 15.7 n/a n/a 0.0 n/a 177.9 10.1 n/a (0.1) 10.2 4.0 6.2 0.0 6.2 0.0 6.2
INDUSTRY COMPARTIVE ANALYSIS The following schedule presents a comparative ratio analysis of Friedman Industries and the median company in the same industry. We compare FRD with the industry median in the following four categories: profitability, liquidity, debt management and asset management. The liquidity ratios give us an indication of FRD’s ability to meet its obligations with the use of current assets. As indicated by the comparative ratio analysis, FRD’s liquidity ratios are superior to that of the industry median. The company has no long term debt and sufficient cash to meet all liabilities. In addition, the company’s payout ratio is a healthy 22.7%. The profitability ratios tell us how well management is doing in managing the company’s assets. FRD’s gross profit margin is less than the industry median. However, operating and net margins are better. The company’s return on equity is about twice as good as the industry median. For the industry median, return on assets is a negative 1.4%. FRD provides a strong ROA of 13.8% In terms of debt management, again the company provides better than industry median experiences. Total liabilities to total assets are a low 9.1%. The company has no long term debt.
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Industry Comparative Analysis
Gross Profit Operating Margin Net Profit Margin Return on Equity Return on Assets
Company 11.90 8.80 5.90 17.10 13.80
Industry Median 19.40 0.70 0.10 8.20 (1.40)
DEBT MANAGEMENT Total Liab. / Total Assets LT Debt / Equity LT Debt / Capital
Company 9.10 0.00 0.00
Industry Median 57.80 14.40 17.60
PROFITABILITY
Quick ratio Current Ratio Payout Ratio Times Interest Earned
Company 5.90 9.50 22.70 n/a
Industry Median 1.10 1.80 0.00 0.70
ASSET MANAGEMENT Receivables Turnover Asset Turnover Inventory Turnover
Company 14.30 2.30 5.70
Industry Median 7.40 1.20 5.40
LIQUIDITY
VALUATION METRICS In determining the fair market value of Friedman Industries, I considered income statement, balance sheet and statement of cash flow data. I give more weight to the statement of cash flows and balance sheet than I do to the income statement and reported or estimated earnings. In my opinion, debt is the greatest determinant of risk and nothing substitutes for cash. I assign a fair market value of $9.79 to the shares of Friedman Industries, Inc. Valuation Ratios
Price Earnings PE to Growth Price to Book Price to Sales Price to Cash Flow Price to Free Cash Flow
Current Company 4.20 0.13 0.70 0.20 4.10 4.00
MA Value 6.99 0.16 1.20 0.41 6.94 6.80
Industry Median 14.30 0.40 1.20 0.50 12.70 9.70
DISCLOSURE: The author has no financial interest in Friedman Industries, Inc. (FRD).
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Current Price Market Cap ($M) Shares Outstanding (M) Institutional Holdings % Insider Holdings % Beta Latest Quarter Reported
Data as of: 10/23/2009
Current Data $5.83 PEG $39.64 EPS TTM ($) 6.8 P/E TTM 32.4 EPS Estimated 2009 ($) 8.8 P/Estimated EPS 1.62 MA Value ($) 06/09 Price Value Ratio
0.13 1.40 4.2 NA NA $9.79 59.6%
Friedman Industries, Incorporated is engaged in steel processing, pipe manufacturing and processing, and steel and pipe distribution. The Company has two product groups: coil and tubular products. The Company sells coil products to approximately 170 customers located primarily in the mid-western, southwestern and southeastern sections of the United States. Its principal customers for coil products and services are steel distributors and customers fabricating steel products, such as storage tanks, steel buildings, farm machinery and equipment, construction equipment, transportation equipment, conveyors and other similar products. During the fiscal year ended March 31, 2009 (fiscal 2009), 17 customers of coil products, accounted for approximately 25% of the Company's sales. The Company's principal customers for tubular products are steel and pipe distributors, piling contractors and U.S. Steel Tubular Products, Inc. (USS). HIGHLIGHTS
Friedman Industries is one of those rare occurrences a company that is selling at near net asset value. For the quarter ending 06/09, the company reported current assets of $43.9 million and total liabilities of $5.6 million. Inventory to Sales was 9.29% at the end of FY09. For the trailing 12 months, the Inventory to Sales ratio increased to 10.41% The EPS growth rate for the trailing 12 months is 38.2%. The three and five year growth rates are 30.2% and 43.5% respectively. FRD has a current ratio of 9.5 and no long term debt. This indicates that the company is financially secure. It is also indicative of a company that may not be putting its assets to the best use. Certainly, the company has room to employ some debt. The company has a Price/Sales ratio of 0.2 based on trailing 12 month sales. This is very favorable.
ANALYSIS OF THE BALANCE SHEET The schedule presented below shows the year-end balance sheets for the years between March 31, 2005 and March 31, 2009. We also show the balance sheet as of June 30, 2009. Cash comprises 50% of the business’s current assets as of June 23, 2009 as compared to 39.6% on March 31, 2009. Inventory comprises 38.3% of the current assets on June 30, 2009 as compared to 45.4% on March 31, 2009. Fixed assets include all of the company’s production machinery and equipment. As of June 30, 2009, Net Property, Plant and Equipment made up 95.4% of non-current assets.
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Overall, the business’s total assets increased approximately 20.9% during the period March 31, 2005 to June 30, 2009. The increase in total assets has been due primarily to increases in cash. During the same period, accounts receivable decreased significantly as did inventory. Accounts payable comprise the largest segment of current liabilities at 78.3%. Accounts payable have decreased dramatically over the past five years, in line with the decrease in accounts receivable. The company reports no long term debt and carries no off-balance sheet liabilities. Balance Sheet (Amounts in Millions) Assets Cash ST Investments Accounts Receivable Inventory Other Current Assets Total Current Assets Net Property,Plant & Equip. LT Investments Goodwill/Intangibles Other LT Assets Total Assets
TTM 06/60/09 21.9 0.0 3.8 16.8 1.4 43.9 16.7 0.0 0.0 0.8 61.4
FYE 03/31/09 16.9 0.0 5.0 19.4 1.4 42.7 17.0 0.0 0.0 0.8 60.5
FYE 03/31/08 2.6 0.0 16.7 29.9 0.1 49.4 16.8 0.0 0.0 0.8 67.0
FYE 03/31/07 1.0 0.0 17.3 33.3 0.2 51.7 13.5 0.0 0.0 0.7 65.9
FYE 03/31/06 2.0 0.0 17.5 28.0 0.1 47.6 7.8 0.0 0.0 0.6 55.9
FYE 03/31/05 0.2 0.0 16.4 25.9 1.0 43.5 6.7 0.0 0.0 0.6 50.8
3.6 0.1 1.0 4.6 0.0 1.0 5.6 0.0 55.7 61.3
2.7 0.1 0.6 3.4 0.0 1.0 4.3 0.0 56.1 60.4
13.5 0.1 1.2 14.8 6.7 0.6 22.0 0.0 45.0 67.0
21.9 0.0 1.4 23.3 0.0 0.5 23.8 0.0 42.1 65.9
16.7 0.0 1.7 18.4 0.0 0.5 18.8 0.0 37.1 55.9
13.5 0.0 1.5 15.0 0.0 0.5 15.4 0.0 35.4 50.8
Liabilities Accounts Payable Short Term Debt Other Current Liabilities Total Current Liabilities LT Debt Other LT Liabilities Total Liabilities Preferred Stock Common Stock Equity Total Liabilities & Equity
ANALYSIS OF THE INCOME STATEMENT Presented below are the income statements for the five year period March 31, 2005 to March 31, 2009 and for the twelve month period ending June 30, 2009. Until 2009, revenues increased steadily from $$188.0 million in FY05 to $208.8 million in FY09. Revenue growth has been 16.8%, 4.7% and 12.4% on a one year, three year and five year basis. As of June 2009, revenue declined 14.1% year-over-year. Operating expenses have been highly variable over the period being examined. In the 12 month period ending 06/09, operating expenses have decreased to $147.2 million or 91.2% of sales as compared to FY08 when operating expenses totaled $172.2 million or 96.3% of sales. Operating expenses were higher in FY07 on higher sales.
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Income Statement Amounts in Millions
Sales Cost of Goods Sold Gross Income Depreciation & Amortization Research/Development Interest Expense Unusual Expenses/(Income) Total Operating Expenses Operating Income Interest Expense - Non-Op. Other Expenses/(Income) Pretax Income Income Taxes Income After Taxes Adjustments to Income Income for Primary EPS Nonrecurring Items Net Income
TTM 06/60/09 161.4 142.2 19.2 n/a n/a 0.0 n/a 147.2 14.3 n/a (0.1) 14.4 4.9 9.5 0.0 9.5 0.0 9.5
FYE 03/31/09 208.8 182.1 26.7 n/a n/a 0.0 n/a 188.1 20.7 n/a (0.1) 20.8 7.1 13.7 0.0 13.7 0.0 13.7
FYE 03/31/08 178.8 167.3 11.5 n/a n/a 0.1 n/a 172.2 6.6 n/a (0.2) 6.8 2.3 4.5 0.0 4.5 0.0 4.5
FYE 03/31/07 199.7 185.1 14.6 n/a n/a 0.0 n/a 189.0 10.7 n/a (0.2) 10.9 3.9 7.0 0.0 7.0 0.0 7.0
FYE 03/31/06 181.9 166.8 15.1 n/a n/a 0.0 n/a 172.1 9.8 n/a (0.3) 10.1 3.6 6.5 0.0 6.5 0.0 6.5
FYE 03/31/05 188.0 172.3 15.7 n/a n/a 0.0 n/a 177.9 10.1 n/a (0.1) 10.2 4.0 6.2 0.0 6.2 0.0 6.2
INDUSTRY COMPARTIVE ANALYSIS The following schedule presents a comparative ratio analysis of Friedman Industries and the median company in the same industry. We compare FRD with the industry median in the following four categories: profitability, liquidity, debt management and asset management. The liquidity ratios give us an indication of FRD’s ability to meet its obligations with the use of current assets. As indicated by the comparative ratio analysis, FRD’s liquidity ratios are superior to that of the industry median. The company has no long term debt and sufficient cash to meet all liabilities. In addition, the company’s payout ratio is a healthy 22.7%. The profitability ratios tell us how well management is doing in managing the company’s assets. FRD’s gross profit margin is less than the industry median. However, operating and net margins are better. The company’s return on equity is about twice as good as the industry median. For the industry median, return on assets is a negative 1.4%. FRD provides a strong ROA of 13.8% In terms of debt management, again the company provides better than industry median experiences. Total liabilities to total assets are a low 9.1%. The company has no long term debt.
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
Industry Comparative Analysis
Gross Profit Operating Margin Net Profit Margin Return on Equity Return on Assets
Company 11.90 8.80 5.90 17.10 13.80
Industry Median 19.40 0.70 0.10 8.20 (1.40)
DEBT MANAGEMENT Total Liab. / Total Assets LT Debt / Equity LT Debt / Capital
Company 9.10 0.00 0.00
Industry Median 57.80 14.40 17.60
PROFITABILITY
Quick ratio Current Ratio Payout Ratio Times Interest Earned
Company 5.90 9.50 22.70 n/a
Industry Median 1.10 1.80 0.00 0.70
ASSET MANAGEMENT Receivables Turnover Asset Turnover Inventory Turnover
Company 14.30 2.30 5.70
Industry Median 7.40 1.20 5.40
LIQUIDITY
VALUATION METRICS In determining the fair market value of Friedman Industries, I considered income statement, balance sheet and statement of cash flow data. I give more weight to the statement of cash flows and balance sheet than I do to the income statement and reported or estimated earnings. In my opinion, debt is the greatest determinant of risk and nothing substitutes for cash. I assign a fair market value of $9.79 to the shares of Friedman Industries, Inc. Valuation Ratios
Price Earnings PE to Growth Price to Book Price to Sales Price to Cash Flow Price to Free Cash Flow
Current Company 4.20 0.13 0.70 0.20 4.10 4.00
MA Value 6.99 0.16 1.20 0.41 6.94 6.80
Industry Median 14.30 0.40 1.20 0.50 12.70 9.70
DISCLOSURE: The author has no financial interest in Friedman Industries, Inc. (FRD).
Please visit http://measuredapproach.wordpress.com for important disclosures. © Copyright 2009 Ronald Sommer. All Rights Reserved.
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