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Measured Approach

FRIEDMAN INDUSTRIES (AMEX:FRD) Data as of: 10/23/2009


Industry: Construction – Supplies and Fixture

Current Data
Current Price $5.83 PEG 0.13
Market Cap ($M) $39.64 EPS TTM ($) 1.40
Shares Outstanding (M) 6.8 P/E TTM 4.2
Institutional Holdings % 32.4 EPS Estimated 2009 ($) NA
Insider Holdings % 8.8 P/Estimated EPS NA
Beta 1.62 MA Value ($) $9.79
Latest Quarter Reported 06/09 Price Value Ratio 59.6%

Friedman Industries, Incorporated is engaged in steel processing, pipe manufacturing and processing, and
steel and pipe distribution. The Company has two product groups: coil and tubular products. The
Company sells coil products to approximately 170 customers located primarily in the mid-western,
southwestern and southeastern sections of the United States. Its principal customers for coil products and
services are steel distributors and customers fabricating steel products, such as storage tanks, steel
buildings, farm machinery and equipment, construction equipment, transportation equipment, conveyors
and other similar products. During the fiscal year ended March 31, 2009 (fiscal 2009), 17 customers of coil
products, accounted for approximately 25% of the Company's sales. The Company's principal customers
for tubular products are steel and pipe distributors, piling contractors and U.S. Steel Tubular Products, Inc.
(USS).

HIGHLIGHTS

 Friedman Industries is one of those rare occurrences a company that is selling at near net asset
value. For the quarter ending 06/09, the company reported current assets of $43.9 million and
total liabilities of $5.6 million.
 Inventory to Sales was 9.29% at the end of FY09. For the trailing 12 months, the Inventory to
Sales ratio increased to 10.41%
 The EPS growth rate for the trailing 12 months is 38.2%. The three and five year growth rates are
30.2% and 43.5% respectively.
 FRD has a current ratio of 9.5 and no long term debt. This indicates that the company is
financially secure. It is also indicative of a company that may not be putting its assets to the best
use. Certainly, the company has room to employ some debt.
 The company has a Price/Sales ratio of 0.2 based on trailing 12 month sales. This is very
favorable.

ANALYSIS OF THE BALANCE SHEET

The schedule presented below shows the year-end balance sheets for the years between March 31, 2005
and March 31, 2009. We also show the balance sheet as of June 30, 2009. Cash comprises 50% of the
business’s current assets as of June 23, 2009 as compared to 39.6% on March 31, 2009. Inventory
comprises 38.3% of the current assets on June 30, 2009 as compared to 45.4% on March 31, 2009.

Fixed assets include all of the company’s production machinery and equipment. As of June 30, 2009, Net
Property, Plant and Equipment made up 95.4% of non-current assets.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Overall, the business’s total assets increased approximately 20.9% during the period March 31, 2005 to
June 30, 2009. The increase in total assets has been due primarily to increases in cash. During the same
period, accounts receivable decreased significantly as did inventory.

Accounts payable comprise the largest segment of current liabilities at 78.3%. Accounts payable have
decreased dramatically over the past five years, in line with the decrease in accounts receivable.

The company reports no long term debt and carries no off-balance sheet liabilities.

Balance Sheet
(Amounts in Millions)
TTM FYE FYE FYE FYE FYE
Assets 06/60/09 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05
Cash 21.9 16.9 2.6 1.0 2.0 0.2
ST Investments 0.0 0.0 0.0 0.0 0.0 0.0
Accounts Receivable 3.8 5.0 16.7 17.3 17.5 16.4
Inventory 16.8 19.4 29.9 33.3 28.0 25.9
Other Current Assets 1.4 1.4 0.1 0.2 0.1 1.0
Total Current Assets 43.9 42.7 49.4 51.7 47.6 43.5
Net Property,Plant & Equip. 16.7 17.0 16.8 13.5 7.8 6.7
LT Investments 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill/Intangibles 0.0 0.0 0.0 0.0 0.0 0.0
Other LT Assets 0.8 0.8 0.8 0.7 0.6 0.6
Total Assets 61.4 60.5 67.0 65.9 55.9 50.8

Liabilities
Accounts Payable 3.6 2.7 13.5 21.9 16.7 13.5
Short Term Debt 0.1 0.1 0.1 0.0 0.0 0.0
Other Current Liabilities 1.0 0.6 1.2 1.4 1.7 1.5
Total Current Liabilities 4.6 3.4 14.8 23.3 18.4 15.0
LT Debt 0.0 0.0 6.7 0.0 0.0 0.0
Other LT Liabilities 1.0 1.0 0.6 0.5 0.5 0.5
Total Liabilities 5.6 4.3 22.0 23.8 18.8 15.4
Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0
Common Stock Equity 55.7 56.1 45.0 42.1 37.1 35.4
Total Liabilities & Equity 61.3 60.4 67.0 65.9 55.9 50.8

ANALYSIS OF THE INCOME STATEMENT

Presented below are the income statements for the five year period March 31, 2005 to March 31, 2009
and for the twelve month period ending June 30, 2009. Until 2009, revenues increased steadily from
$$188.0 million in FY05 to $208.8 million in FY09. Revenue growth has been 16.8%, 4.7% and 12.4% on a
one year, three year and five year basis. As of June 2009, revenue declined 14.1% year-over-year.

Operating expenses have been highly variable over the period being examined. In the 12 month period
ending 06/09, operating expenses have decreased to $147.2 million or 91.2% of sales as compared to
FY08 when operating expenses totaled $172.2 million or 96.3% of sales. Operating expenses were higher
in FY07 on higher sales.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Income Statement
Amounts in Millions
TTM FYE FYE FYE FYE FYE
06/60/09 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05
Sales 161.4 208.8 178.8 199.7 181.9 188.0
Cost of Goods Sold 142.2 182.1 167.3 185.1 166.8 172.3
Gross Income 19.2 26.7 11.5 14.6 15.1 15.7
Depreciation & Amortization n/a n/a n/a n/a n/a n/a
Research/Development n/a n/a n/a n/a n/a n/a
Interest Expense 0.0 0.0 0.1 0.0 0.0 0.0
Unusual Expenses/(Income) n/a n/a n/a n/a n/a n/a
Total Operating Expenses 147.2 188.1 172.2 189.0 172.1 177.9
Operating Income 14.3 20.7 6.6 10.7 9.8 10.1
Interest Expense - Non-Op. n/a n/a n/a n/a n/a n/a
Other Expenses/(Income) (0.1) (0.1) (0.2) (0.2) (0.3) (0.1)
Pretax Income 14.4 20.8 6.8 10.9 10.1 10.2
Income Taxes 4.9 7.1 2.3 3.9 3.6 4.0
Income After Taxes 9.5 13.7 4.5 7.0 6.5 6.2
Adjustments to Income 0.0 0.0 0.0 0.0 0.0 0.0
Income for Primary EPS 9.5 13.7 4.5 7.0 6.5 6.2
Nonrecurring Items 0.0 0.0 0.0 0.0 0.0 0.0
Net Income 9.5 13.7 4.5 7.0 6.5 6.2

INDUSTRY COMPARTIVE ANALYSIS

The following schedule presents a comparative ratio analysis of Friedman Industries and the median
company in the same industry. We compare FRD with the industry median in the following four
categories: profitability, liquidity, debt management and asset management.

The liquidity ratios give us an indication of FRD’s ability to meet its obligations with the use of current
assets. As indicated by the comparative ratio analysis, FRD’s liquidity ratios are superior to that of the
industry median. The company has no long term debt and sufficient cash to meet all liabilities. In addition,
the company’s payout ratio is a healthy 22.7%.

The profitability ratios tell us how well management is doing in managing the company’s assets. FRD’s
gross profit margin is less than the industry median. However, operating and net margins are better. The
company’s return on equity is about twice as good as the industry median. For the industry median,
return on assets is a negative 1.4%. FRD provides a strong ROA of 13.8%

In terms of debt management, again the company provides better than industry median experiences.
Total liabilities to total assets are a low 9.1%. The company has no long term debt.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Industry Comparative Analysis

Industry Industry
PROFITABILITY Company Median LIQUIDITY Company Median
Gross Profit 11.90 19.40 Quick ratio 5.90 1.10
Operating Margin 8.80 0.70 Current Ratio 9.50 1.80
Net Profit Margin 5.90 0.10 Payout Ratio 22.70 0.00
Return on Equity 17.10 8.20 Times Interest Earned n/a 0.70
Return on Assets 13.80 (1.40)

Industry Industry
DEBT MANAGEMENT Company Median ASSET MANAGEMENT Company Median
Total Liab. / Total Assets 9.10 57.80 Receivables Turnover 14.30 7.40
LT Debt / Equity 0.00 14.40 Asset Turnover 2.30 1.20
LT Debt / Capital 0.00 17.60 Inventory Turnover 5.70 5.40

VALUATION METRICS

In determining the fair market value of Friedman Industries, I considered income statement, balance
sheet and statement of cash flow data. I give more weight to the statement of cash flows and balance
sheet than I do to the income statement and reported or estimated earnings. In my opinion, debt is the
greatest determinant of risk and nothing substitutes for cash.

I assign a fair market value of $9.79 to the shares of Friedman Industries, Inc.

Valuation Ratios

Current MA Industry
Company Value Median
Price Earnings 4.20 6.99 14.30
PE to Growth 0.13 0.16 0.40
Price to Book 0.70 1.20 1.20
Price to Sales 0.20 0.41 0.50
Price to Cash Flow 4.10 6.94 12.70
Price to Free Cash Flow 4.00 6.80 9.70

DISCLOSURE: The author has no financial interest in Friedman Industries, Inc. (FRD).

Please visit http://measuredapproach.wordpress.com for important disclosures.


© Copyright 2009 Ronald Sommer. All Rights Reserved.