The stock of Friedman Industries (AMEX:FRD, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $8.3793 per share and the market cap of $57.9 million, Friedman Industries stock is believed to be significantly overvalued. GF Value for Friedman Industries is shown in the chart below.
Because Friedman Industries is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 21.4% over the past five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Friedman Industries has a cash-to-debt ratio of 7.91, which is better than 84% of the companies in Steel industry. The overall financial strength of Friedman Industries is 8 out of 10, which indicates that the financial strength of Friedman Industries is strong. This is the debt and cash of Friedman Industries over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Friedman Industries has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $109.9 million and loss of $0.29 a share. Its operating margin is 1.58%, which ranks in the middle range of the companies in Steel industry. Overall, the profitability of Friedman Industries is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Friedman Industries over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Friedman Industries is 21.4%, which ranks better than 87% of the companies in Steel industry. The 3-year average EBITDA growth is -26.7%, which ranks worse than 88% of the companies in Steel industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Friedman Industries's ROIC is 2.54 while its WACC came in at 6.77. The historical ROIC vs WACC comparison of Friedman Industries is shown below:
In conclusion, the stock of Friedman Industries (AMEX:FRD, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks worse than 88% of the companies in Steel industry. To learn more about Friedman Industries stock, you can check out its 30-year Financials here.
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