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LB Foster Co. Message Board

  • bilboba2004 bilboba2004 Sep 26, 2006 5:29 PM Flag

    FSTR per share of DM&E analysis

    Strails,

    This might help. If DM&E asset value is insured at $1 billion - per DM&E's insurance agent's presentation to the FRA last week, look at the following possible cash value per share of FSTR.

    $1 billion asset value, less $220 million estimated current FRA debt = common equity value of $780 million. FSTR owns 13.4 % of DM&E = 104,520,000 divided by 10,500,000 fully diluted shares outstanding of FSTR = $9.95 per common share of FSTR. Current price of $16.50. Is the underlying business only worth $6.55 per share? I don't think so.

    I do not believe that the above analysis discounts any value for DM&E's PRB project, nor does it consider any synergy value to an acquiring railroad if DM&E is ultimately acquired by a Class I railroad - which I expect will be the case. Come up with whatever premium for the PRB project that you think makes sense and add that value to the total - divide by 10.5 million FSTR shares and you have a new cash value per share of FSTR. A very compelling buy in my opinion.

    When the FRA approves the loan I would expect the value of the PRB project to then be reflected in the value of DM&E. All upside from here.

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    • Gentlemen,

      Foster is worth about 13 excluding DM&E. The company is growing, but needs to start generating free cash, pay off debt, and buy back stock. DM&E is worth about 400 millon
      right now, might be worth up to 1.2 billion if expansion goes through. If the deal does not go through, Foster should monetize the holding by possibly selling its stake to DM&E. It could then pay off all debt and buy in about 10% of its float. Either way, there is little downside risk from here. A buyout of Foster or DM&E is always possible.
      Enjoy,

      Tuscanaa

      • 1 Reply to tuscanaa
      • I think you're in the right ball park but believe your valuation analysis is conservative. When PRB is financed, for example, the obvious strategic investors will step up - namely NS, CP & CN as the most likely candidates. The railroads will pay more for DM&E than a stand-alone market valuation due to the synergies of captive plants along the acquiring railroads respective networks. Look at a Class I rail map to determine how interesting DM&E looks to the above and overlay that on the plants that those railroads serve. You can easily see how one of the big railroads above would like to ultimately own DM&E. This being the case, your $1.2B figure is conservative. It's more like $2-3 BN now and significantly more the closer DM&E is to first shipments of PRB coal - an acquisition 3-years from now will be accretive to the acquirer and the analysts will start to discount those earnings in the acquiring company's pro-forma financials. In all cases, if your $13 per share for the existing business is correct, and you add another $10-15 per FSTR share based on the value of its holding in DM&E - a relatively conservative acquisition scenario would imply significantly more than the $16.50 we see today.

        FSTR shares are a veritable bargain at $16.50 per share. The shorts will get squeezed in no time.

 
FSTR
50.63+0.28(+0.56%)Jan 23 3:59 PMEST

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