Net-net investing is not in fashion right now and hasn’t been for a long time. It’s quite interesting how things seem to go in cycles. 12 years ago when I started there were many more investors in net-nets. I’ve been poking around a few names and finding some things of interest.
The industry has not gone through a bunch of change over the last decade. Below is the income statement.
You can see they have bumped around profitability, but they have managed to keep opex fairly stable while business activity has been volatile.
The business has generated cash off and on through the last decade. You can see the large capex initiatives that have been made to drive efficiencies in operations. It’s hard to tell how much value the previous investment in capital equipment added in value.
The business is working capital heavy, primarily in inventory. It’s important to monitor turns and conversion on this business.
As mentioned previously FRD is heavy in working capital, but they do also have some cash on the balance sheet.
The good news is that the there is not much obsolescence risk with FRD as the finished products will likely be used and purchases will just be delayed and not eliminated permanently.
There have been many critics of net-nets. They are notoriously hard to hold as they are usually bad businesses, poorly run businesses, have misaligned incentives or management that doesn’t understand the value of capital allocation (or all of the above). There are many back tests that demonstrate that having a solid net net strategy can produce above average returns. It’s a simple strategy but not easy. You need a black belt in patience to invest in net-nets. Holding onto some business that bumps along while all your fintwit friends are getting rich off crypto, SaaS, cannabis, etc. is so hard. I like to have a business where the management team is not just sitting on their hands from either an operational or capital allocation standpoint.
Friedman’s new CEO has shown a willingness to spend some excess cash on equipment to improve the business. Also, a share repurchase program for up to 15% of shares outstanding was initiated. Finally, they announced that they are going to try price hedging for the price of steel. I’m happy to see some action being taken rather than just sitting on excess cash.
I took a stab at the valuation each quarter going back to fiscal 2009 for FRD. You can see that though NCAV has come down from over $8 to about $7.50, the price to NCAV has also dropped.
Purchasing at a discount to NCAV and waiting for some positive news (and a likely higher valuation) seems low risk to me. However, there is so much uncertainty with covid that things may get worse or not rebound as quickly as anticipated.
Anyone else hold FRD?
*the author does not have a position in FRD at time of posting, but may initiate one at any time.