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 $10.19 per share and the market cap of $70.4 million, Friedman Industries stock appears 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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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Friedman Industries has a cash-to-debt ratio of 7.91, which ranks better than 84% of the companies in Steel industry. Based on this, GuruFocus ranks Friedman Industries's financial strength as 9 out of 10, suggesting strong balance sheet. This is the debt and cash of Friedman Industries over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low 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, GuruFocus ranks the profitability of Friedman Industries at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Friedman Industries over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Friedman Industries is 21.4%, which ranks better than 91% of the companies in Steel industry. The 3-year average EBITDA growth rate is -26.7%, which ranks worse than 88% of the companies in Steel industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Friedman Industries's return on invested capital is 2.54, and its cost of capital is 6.56. The historical ROIC vs WACC comparison of Friedman Industries is shown below:
Overall, 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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