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:
- FRD generates respectable returns on capital, e.g., they will produce a 10.5% ROE this year with an unlevered balance sheet.
- Their coil business represents about half of this year’s revenue but only 8% of this year’s EBIT.
- 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).
- 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.