Friedman Industries Incorporated (AMEX:FRD), a USD$41.08M small-cap, operates in the basic materials industry which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Basic material analysts are forecasting for the entire industry, a highly optimistic growth of 30.80% in the upcoming year , and a massive growth of 44.17% over the next couple of years. However this rate still came in below the growth rate of the US stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether FRD is lagging or leading in the industry. Check out our latest analysis for Friedman Industries
What’s the catalyst for FRD’s sector growth?
As a whole, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly competitive and consolidation seems to be a common theme. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth in the twenties, beating the US market growth of 10.30%. FRD leads the pack with its impressive earnings growth of 39.11% over the past year. This proven growth may make FRD a more expensive stock relative to its peers.
Is FRD and the sector relatively cheap?
The metals and mining industry is trading at a PE ratio of 26x, relatively similar to the rest of the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 5.76% compared to the market’s 10.06%, potentially indicative of past headwinds. Since FRD’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge FRD’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? FRD recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto FRD as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value FRD based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If FRD has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the metals and mining industry. Before you make a decision on the stock, take a look at FRD’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into Friedman Industries’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.