Friedman Industries: Another Graham & Schloss Play
Walter Schloss was a legendary value investor who outperformed the market for over 50 years. He never used a spread sheet, a computer, or Bloomberg Terminal. All Mr. Schloss used was the value investing principals outline by Benjamin Graham and a copy of Value Line. This man outperformed numerous hedge fund managers with just Value Line Investment Survey. He was a simple man who never went to college, and was good friends with Warren Buffett. I wish more fund managers were like him. In honor of Mr. Schloss, I am writing another article on a company that meets his simple and profitable standards.
Friedman is a classic Walter Schloss kind of stock. In the current market environment, few companies meet Schloss standards. Friedman has everything a classic value investor looks for -- predictable earnings, flush with cash and selling for less than tangible assets. The company has a long history of consistent earnings with a 3.3% dividend yield to boot.
Friedman Passes Schloss Standards:
- Shareholder Friendly.
- Large Insider Ownership.
- Profitable for 10 years straight.
- Free Cash Flow Positive.
- Flush With Cash and Has A Clean Balance Sheet.
Thanks to the global sell-off in equities, Friedman Industries (FRD) is selling for $5.95/share. Friedman is a steel and tube manufacturer and wholesaler. The company has a tangible book value of $9.36 and a net current asset value of $6.83. There are few companies in the market today that are selling for less than net current asset value.
Friedman produces stable earnings and has a solid balance sheet. Few steel businesses in the market today can produce stable earning over 10 years. Friedman is boring and easy to understand, and its financial statements are simple and easy to read. The company has a clean balance sheet with no off the book liabilities. Friedman's reported earnings of $1.7 million on sales of $116 million for 2014 compared to $6 million in earnings on sales of $136 million last year. Friedman's decline in sales and net earnings was caused by weak demand from the firms tubular division.
The company is selling for 7x times its cash adjusted p/e ratio and 0.6 times book value. Currently the company is selling for less than net current asset value. The firm also sells for less than reproduction value and earning power value. Friedman is selling for 60 cents on the dollar due to the irrational market place. There are risks in investing into Friedman but the only risk the company imposes is from the price of steel. Current market valuation of Friedman doesn't show business value. Friedman has a market cap of $44 million and a net current assets of $52 million. In the short run Friedman's earnings will be volatile because of the lower price for steel. Clearly the market is mispricing Friedman because of its lower than expected earnings last year, and the depressed demand for steel globally. You can acquire a stake in a company due to the market selling for less than estimated business value with a margin of safety of 26%.
Posted in ...Market Commentary