Friedman Upgraded to Outperform on Synergies, BV Value & Capacity

Core Insights - Friedman Industries, Incorporated (FRD) has been upgraded to "Outperform" from "Neutral" following a record-volume quarter and the acquisition of Century Metals, marking a transition to a larger operational scale [1] - The stock is currently trading close to tangible book value, suggesting the market views FRD more as a commodity distributor rather than a growing service-center network with enhanced geography and product offerings [1] Acquisition and Synergies - The acquisition of Century Metals expands FRD's product offerings beyond flat-roll and pipe to include cold-rolled, coated sheet, stainless, and non-ferrous products, enhancing its Southeast footprint and opening new demand channels in Latin America [2] - Management anticipates "promising synergies" from the acquisition, with initial benefits including volume smoothing to offset seasonal slowdowns [2] Valuation Metrics - FRD's tangible book value per share has been increasing, yet the stock trades at approximately 0.9x P/B, which is below several peers despite the expanded earnings capacity from the Century acquisition [3] - Near-term earnings are impacted by integration costs and a non-normalized steel margin environment, with the company incurring about $0.9 million in one-time acquisition expenses in Q2 fiscal 2026 [4] Capacity Expansion - Organic capacity growth is a significant driver for FRD, with the new Sinton, TX facility reaching full capacity and delivering the highest margins in the system [5] - Additional processing capacity is being added across the network, including $1.9 million for equipment upgrades at Granite City, IL, which supports continued tonnage growth and lower unit costs [6] Insider Activity - Recent modest insider buying is notable given the stock's pricing near book value, indicating that insiders perceive the current valuation as misaligned with the company's expanding earnings and capacity [7] Structural Positioning and Outlook - FRD is enhancing its operational scale with the Century acquisition, which adds new geographies and higher-value products, while upgrades at Granite City and Sinton facilities are expected to improve throughput and margins [11] - If integration and capacity expansion continue successfully, FRD is positioned to increase earnings in the next up-cycle, with the market not yet reflecting this operational leverage in its valuation [12]