Monty Rakusen
Friedman Industries (NYSE:FRD) 1Q25 results were in line with our expectations of flat to lower processing. The offsetting of operating income damage from lower hot rolled coil prices by hedging was observed during this quarter.
The quarter confirmed that price fluctuations do not significantly impact long-term profits. Volumes remain the main focus, and despite a lack of growth, the increase in coil prices may lead to a profitable 2Q25 for Friedman.
Overall, the valuation remains unattractive given the company’s long-term production capacity and average profitability. Hence, I maintain my Hold rating.
1Q25 Performance in Review
Flat to Decline in Production: Friedman’s long-term profitability heavily relies on production volumes. Despite fluctuations in steel coil prices from quarter to quarter, or between operating and hedge income, the company has maintained processing business stability.
Production in 1Q25 was lower than the previous quarter, totaling 133 thousand tons processed compared to 143 thousand tons in 1Q24. Since the addition of capacity from Mitsubishi and the start of operations at the Sinton facility in 1Q24, production volumes have remained in the 130 to 140 thousand ton range.
Effect of Lower Hedged Prices: The company faced operating losses in the quarter due to a contraction in gross margins from 21% to approximately 16%. This decline in margins was attributed to a 40% drop in hot-rolled coil prices during the quarter. However, the company recorded $5.4 million in hedging gains, resulting in positive pre-tax profits of $3.2 million, albeit lower than the previous year.
Operating Expense Increase: Concerningly, processing and warehousing expenses increased by 25% YoY, and deliveries increased by 10% YoY. These fixed costs, not sensitive to coil prices, provide a better insight into Friedman’s true overhead. These expenses were offset by a decrease in G&A expenses but led to a rise in overall overhead costs, necessitating higher revenue generation for profitability.
Unhedged Gains in 2Q25: Notably, the company ended 1Q25 without hedged positions, implying potential benefits from positive price movements in hot-rolled coil futures. With price increases observed in HRC futures from July to September, Friedman is well-positioned for improved margins in 2Q25.
Valuation Assessment
Based on previous forecasts, Friedman’s long-term operating profits are expected to stabilize around $20 million per year, resulting in an EV/NOPAT multiple of 10x. The company’s market cap suggests a similar multiple, indicating fair but not overly favorable valuations compared to other companies with better growth prospects.
At current prices, Friedman may not present a compelling investment opportunity. However, ongoing monitoring is advised, especially if unhedged positions lead to unexpected operational losses.
