$10.34
$49.18
bear $10.34
base $37.81
bull $49.18
margin of safety $17.00
market price* $40.48
Friedman Industries buys steel coil from a limited number of mills and processes it: cutting it to length, slitting and leveling it, and (at one Texas plant) welding pipe. About 92% of sales come from flat-roll products sold to roughly 1,160 customers, mainly metals distributors and makers of metal buildings, railcars, trailers and heavy equipment, from plants in Arkansas, Alabama, Florida, Indiana, Illinois and Texas. The rest is welded pipe made in Lone Star, Texas for about 80 distributors. One customer, O'Neal Steel, was 15% of fiscal 2026 sales. Nearly all revenue comes from selling company-owned steel, so profits depend on the spread between what it pays mills and what it charges, which swings with the steel cycle. On August 29, 2025 it bought Century Metals & Supplies of Miami for $51.6 million ($45.6 million cash, a $3.5 million five-year seller note and an earn-out of up to $10 million over four years, recorded at $2.2 million). How we measured earnings. We use owner earnings: operating cash flow, less the cash tied up in receivables, inventory and payables, less stock compensation, less only the maintenance part of capital spending (capex growth is treated as discretionary). Per share this came to about -$0.38, $0.95, $1.12, -$0.65, $0.39, $1.61, $2.88, $2.15, $0.49 and $2.92 for fiscal 2017 through 2026 (years end March 31). Because lenders are paid separately, we value the business before interest, so we add back cash interest paid. On that basis fiscal 2022 through 2026 were $1.64, $3.15, $2.57, $0.92 and $3.48 per share. Fiscal 2026 operating cash flow was only $8.5 million against $19.5 million of net earnings because receivables and inventory grew by about $43 million, partly funded by $22 million of higher payables and $6 million of higher accrued pay; net, working capital absorbed about $16 million. The starting level. Sales jumped from $126 million in fiscal 2021 to $285 million in fiscal 2022 and stayed above $440 million every year after, as the company added plants, so we measure from fiscal 2022. That window holds the steel boom (fiscal 2022 and 2023) and the weak fiscal 2025. Its median is $2.57 per share (fiscal 2024). Earlier years describe a business a fraction of the size and are not used for the level. Recent-year check: the pre-interest figure rose from $0.92 to $3.48 per share in fiscal 2026 (about +277%), while our first-year figure of $3.06 is about 12% below fiscal 2026, so we are not assuming any acceleration. The June 2026 quarter was strong (sales $240.0 million, operating income $21.0 million, net earnings $12.8 million against $5.0 million a year earlier) but operating cash flow was $7.3 million as inventory and receivables built and hedges lost $2.8 million. One quarter does not move our level. What we credited. Growth: none from the market, share gains, volume trends or management targets. Same-facility volume rose 17% in fiscal 2026, but the company has no long, steady record of small self-funded expansion; its expansion has come in large steps, mostly funded with borrowing, so we left it out. One step is already closed and paid for: Century. The company's own pro forma shows Century would have added about $4.7 million of operating earnings in fiscal 2025, a weak year ($7.4 million pro forma against $2.8 million reported). The five months before the deal added about $4.8 million to fiscal 2026 ($30.5 million pro forma against $25.7 million reported), so $4.7 million a year looks reasonable. After 25% tax that is about $3.5 million, or $0.48 per share, which we add to every case. The purchase produced no goodwill, so there is no large acquired intangible to wear away. Realized and unrealized hedging gains on steel inventory ($3.4 million in fiscal 2026, $7.6 million in fiscal 2025) are counted as results because they offset inventory price swings. Debt. At June 30, 2026 the company owed $91.5 million on its $140 million asset-based revolver (SOFR plus 1.65% or prime less 1.45%, due August 29, 2030, secured by substantially all assets, with a covenant tested only if availability falls below the greater of 10% of the commitment or $14 million), plus the $3.5 million seller note and the $2.2 million earn-out estimate, less about $2.5 million of cash beyond operating needs: net debt of $94.6 million, or $13.12 per share on 7.21 million shares. The revolver's cost is close to 6%, so no cost adjustment was made. We estimate interest at about $5.6 million a year. Base case: the business earns $3.06 per share ($22.0 million) a year before interest (the $2.57 median plus $0.48 for Century, rounded), for ten years and beyond, since the plants are kept up by the maintenance spending already deducted and the company has operated since 1965. At 6% that is worth $50.93 per share ($367 million); less $13.12 of debt, we get $37.81. Bear case: steel spreads stay at fiscal 2025 levels, when operating earnings were just $2.8 million on $445 million of sales and hedge gains carried the year. The business earns $0.92 plus $0.48, or $1.41 per share ($10.2 million), every year. It is worth $23.46 per share ($169 million); less $13.12 of debt, we get $10.34. Interest of about $5.6 million is still covered about 1.8 times, but shareholders keep only part of the value, and losing the O'Neal account or a key mill supplier would be a further threat. Bull case: the two strongest years, fiscal 2023 ($3.15) and fiscal 2026 ($3.48), average $3.32; adding $0.48 for Century gives $3.80 per share ($27.4 million). It is worth $63.39 per share ($457 million). We subtract $13.12 of debt and the rest of the maximum $10 million earn-out (about $1.09 per share), because the earn-out pays out only when Century does well, giving $49.18. Why this differs from our earlier estimate. Our previous base of $13.19 used an 11% required return and 2% growth. We now use a uniform 6% required return and put risk into the three cases, and we no longer credit growth. The earnings level is similar: $3.06 per share before interest is about $16 million after roughly $5.6 million of interest, against about $17 million before. The lower rate accounts for almost all of the increase. Our previous bear ($8.35) rested on asset values; this one rests on a repeat of the fiscal 2025 trough. What we tested. The largest assumption is that Century adds about $4.7 million a year; the pro forma above, the absence of goodwill and the strong pre-deal months all support it. The largest risk to the base case is that fiscal 2022 to 2026 was unusually good for steel processors. Fiscal 2025 shows how thin results become in a weak year, which is why the bear case is built from it. The June 2026 quarterly figures come from the company's tagged financial data rather than a full read of the quarterly report. The margin-of-safety price is near $17. From that price the base case implies about 20% a year if the shares reached the base value in roughly four years, while a fall to the bear value would be a loss of about 39%, reflecting a cyclical, borrowing-funded small company.