Description

So let me start off with an exciting statement: This is possibly the worst company in the world in the worst industry in the world. And its a long.  Got your attention yet?

This is an old school Graham type "net net"

FRD is a steel re-manufactuter. It has 2 segments. Hot rolled coil which is basically buying low quality steel from Nucor, remanufacturing into into commodity products like rail cars etc and selling it 5-6% on average gross margin.  Its a terrible business.  The second segment which was essentially dead is buying pipes from US Steel's Lone Star plant and remanufacturing them and selling them back to US Steel. This segment was dead, but slowly coming back to life. Lone Star was shut down, one line out of two is permanently closed, but came back online and FRD has found some new customers in the mean time.  

2017/2016 the company is at its lowest production of tons in 10 years, running on cash flow breakeven mode, running off some inventory and is generating positive operating cash flows with still prices in the $500s. Context, today they are $800-$966 http://steelbenchmarker.com/files/history.pdf and http://www.nwitimes.com/business/lake-newsletter/steel-prices-soaring-in-anticipation-of-tariffs/article_a80d9390-c02c-55c9-acb9-25e857a5fb52.html in anticipation of Trump tarrifs. Last quarter's realized price was $660)

So what are you getting for $42mm?

- Cash of $2mm

 - Inventory $46.4mm (FIFO) or $52.4mm at LIFO (for purposes of liquidation analysis I am choosing to use LIFO)

-  AR of $7mm

 - Tax Receviable from Feds at $1mm

 and ~ $10.8mm of Current Liabilities including a $3.7mm line of credit

 = NWC $52mm

 They also have $14.5mm of PPE of which $10mm is a brand new plant in Texas and $1mm is land valued at 1960s prices. Not sure what its worth but tangible book value is $66.5mm.

So you're getting this for .60x TBV and .75x NWC  The point of this is ... there may be some stock price draw downs but I think permanent capital impairment is low.

Historically its traded at 1.5x-2.0x BV (not even sure how to value this on earnings/cash flows etc). Thats when the energy markets were booming and we weren't coming out of an industrial recession so a $14-$15 longer term price target is feasible.

So my thesis is this. This should be a small position, not super gun ho about it. Its a small position for me. But downside of permanent capital impairment is low, it pays a tiny dividend, and if energy market starts to order pipes again (and CapEx is growing) and US Steel ramps up Lone Star (US Steel is having its own issues but the new tarriffs seem to make them gun ho ... this is pretty funny .... http://money.cnn.com/2018/03/06/news/economy/steel-ceo-trump-tariff/index.html) then this stock is back to historical P/BV valuations and up 100-200%. If not, you might lose maybe 20% as inventory continues to draw down and the net-net gets smaller. Basically heads you dont lose much, tails you win.

I wish it could be sexier but its not. But I like the risk-reward and wanted to share. VNB owns a bit and they are smart guys so thats how it caught my eye.

The risks are obvious

 - steel prices (current avg realized price for these guys is $660/t up from $508 a year+ ago and $408 in 1Q16)

 - oil prices (for pipe demand)

 - management is probably checked out. Own less than 1% and CEO's salary is a $110k. CFO is $90k. They arent rent seeking but who knows with new CEO (internal hire). Diversifying from US Steel was a good move. Hopefully he can drive some value, but not expecting much.

Catalyst

- Tariff led steel price increases

- Build up of cash flow, special dividend

- Maybe an acqusition for someone