Friedman Industries’ Q1 Confirms Our Views, Stock Still Not Attractive (NYSE:FRD)

Friedman Industries (NYSE: FRD) 1Q25 results were in line with our expectations of flat to lower processing. The damage to operating income caused by lower hot rolled coil prices was offset by hedging.

The quarter confirms our price reading not affecting long-term profits too much, giving more importance to volumes, which have not increased. However, as of June 2024, Friedman has not hedged his bets and coil prices have risen, likely leading to a profitable 2-25 quarter.

Overall, the valuation remains unattractive given the company’s long-term production capacity and average profitability. I maintain my hold rating.

1Q25 in line

Production flat down: The most important factor for Friedman’s long-term profitability is production volumes. The company has a processing business, where price increases or decreases in steel coil cancel out between quarters or between operating income and hedges.

1Q25 production was disappointing, lower than in the previous quarter, at a total of 133 thousand tons processed. This compares with 143 thousand tons in 1Q24. Since 1Q24, when the company’s Sinton facility started operating and the company added capacity from Mitsubishi, production volumes have remained in the 130 to 140 thousand tonne range.

Lower prices covered: The company posted operating losses for the quarter as its gross margins contracted from 21% to about 16% this quarter. This was caused by hot rolled coil prices contracting by 40% from the beginning to the end of the quarter. However, the company posted $5.4 million in hedging gains, leading to pre-tax profits that, while much lower than last year (1/3), were still positive at 3.2 millions of dollars. This also confirms my view that price swings are not that big of a problem in Friedman’s profitability.

OpEx growth: Of much more concern was the increase in processing and warehousing expenses (25% YoY) and deliveries (10% YoY). These expenses should not move with coil prices and therefore constitute a better approximation of Friedman’s true overhead. These costs were offset by lower additional costs (-25%). Overall, ex-CoGS overhead was up 4.5% or about a million. At average post-GFC gross margins of 9%, this requires an additional income of $10 million or about 10 thousand tonnes of processing at a price of about $900 per tonne. Also, you have to remember that SG&A worked as a variable expense in my previous model, but now it’s increasing even with low revenues and volumes.

Uncovered earnings in 2Q25: Looking at the company’s 10-Q for 1Q25, we can see that it left Q1 with no hedged positions. It was short, just 280 tons of hot rolled coil. This means that the company will benefit more from a positive price movement between July and September (its stock will be sold at a higher price later as a finished product). We can see that HRC futures started in July at $650 and are now trading around $714, with a peak a few weeks ago at $750. This will likely report a gain in accumulated gross margin.

The rating remains unattractive

In my previous article, I proposed a model from which I estimated Friedman’s long-term operating profits to be around $20 million per year, or $15 million in NOPAT. As of today, the company has an EV of about $150 million, or an EV/NOPAT of 10x.

In terms of market capitalization, the company trades at around $105 million. In my model, based on both return on assets minus cost of debt and operating income minus average interest, I expected the company to produce $10 million in net income. Again, the multiple is about 10x.

I don’t think these multiples are excessive, but they are certainly not opportunistic. Today, there are many companies trading at similar current yields, with better growth prospects and less traded products.

In my opinion, Friedman is not an opportunity at these prices, but I will continue to watch the stock for potential deeps (especially if an uncovered position causes a larger than expected operating loss).