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L.B. Foster Company - Reparing America's Holes

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April 18, 2010 – Comments (2) | RELATED TICKERS: FSTR , BRK-A , PRPX.DL

In our opinion, had Mr. Obama spent the past year repairing America's holes by getting Americans back to work instead of using all of his political capital to get the health care bill passed, we think the American economy would be much further along the road to recovery than it currently may be.

One of the areas where we have been extremely disappointed is the lack of commitment on the part of the Obama Administration towards America's infrastructure, which was originally how a large portion of the economic stimulus monies were going to be spent.

All of this came to our attention several days ago in an article we noticed that mentioned that America's railroads were handling more traffic.

Certainly such news may be great for Warren Buffett, given the recent purchase of Burlington Northern Santa Fe railroad by Berkshire Hathaway, Inc. (NYSE: BRK.A), but what about the rest of us, the folks that don't have $118,400 to plunk down for a single share of stock?

While we certainly salute Mr. Buffett on his recent railroad purchase, at Wax Ink we simply aren't interested in owning a railroad. We are however interested in owning a company that makes rail products, not to mention piling products, bridge products, and structural steel products, all of which we consider infrastructure products, all of which are manufactured by the L. B. Foster Company (Nasdaq: FSTR).

Basis
Financial information related to The L.B. Foster Company contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 12, 2010.

What They Do
The company's business is the manufacture, fabrication, and distribution of products and services for the rail, construction, energy, and utility markets in the United States. It operates in three segments: Rail Products, Construction Products, and Tubular Products.

For the rail markets, the company provides new and used rail, trackwork, and accessories to railroads, mines and industry. The company also designs and produces concrete railroad ties, insulated rail joints, power rail, track fasteners, coverboards and special accessories for mass transit and other rail systems worldwide.

For the construction industry, the company sells steel sheet piling, H-bearing piling, pipe piling and provides rental sheet piling for foundation requirements. In addition, the company supplies precast concrete buildings, fabricated structural steel, bridge decking, bridge railing, expansion joints and other products for highway construction and repair.

For the tubular markets, the company supplies pipe coatings for natural gas pipelines and utilities and produces threaded pipe products for industrial water well and irrigation markets as well as selling micropiles for construction foundation repair and slope stabilization.

Short-Term Investment
We noticed there was a substantial increase in trading volume on Friday, which we assume is because the Antitrust Division of the Justice Department is set to sign-off on the company's proposed merger with Portec Rail Products, Inc. (Nasdaq: PRPX).

Certainly for the short-term trader this may be good news. We however, think that taking a short-term position in the stock at this time, would be like lifting the toilet seat having already made water.

The stock closed recently at $32.13 with resistance at $35.09 and support at $29.89. With an upside potential from its recent close of 9% and a downside potential from its recent close of 7%, we simply can find no reason to initiate a short-term trade at this time.

Long-Term (5 Year Hold) Investment
Considering the age of America's infrastructure, we think the company is in not only in an ideal business, but has investment quality financial metrics.

The company ended FY09 with a Current Ratio of 3.64, Quick Ratio of 2.33, a Cash Ratio of 1.56, and a Debt to EBITDA Ratio of 0.74, all of which far exceed our investment quality minimum threshold.

There is room for improvement in the company's financial statements however. For instance the company ended FY09 with Return on Invested Capital at 16.31%, which is a reasonable number given the business the company is in, although to us, we think an investment quality number for this metric should be above 20%.

We would also like to see an increase in the collection time for the company's Account Receivables. While we are pleased that Accounts Receivable are outstanding an average of 59 days and Accounts Payable are outstanding an average of 72 days, we think that Accounts Receivable at 16% of Sales is a bit on the high side, and should it remain at this level, will eventually start to eat into the company's available cash flow.

Last but not least, we were impressed with the company;s FY09 Free Cash Flow of $2.50. Given the current economic climate, we think that a Free Cash Flow to Operating Cash Flow Ratio of 0.51 shows that management's collective head is in the game.

Valuations
Based on our preliminary assessment of the company, we think a Reasonable Value Estimate for the stock is in the $61-$66 range and that a reasonable entry target in the $29-$33 range, as supported by our Graham number calculation of $31, our Tangible Book Value calculation of $23, and our Net Current Asset Value calculation of $18.

Final Thoughts
Had the Obama Administration invested in American workers that sweat for a living instead of Wall Street workers that sweat American workers out of a living, we believe company's like L. B. Foster would already be hard at work repairing the holes in America's infrastructure.

This of course begs the question just how many holes actually need repairing in America?

By our count, the correct number is 535, that is unless it's that special four-year Tuesday, in which case the number soars to 536.

Wax

To download the Wax Ink L.B. Foster Company Raw Value Worksheet, please click here.

2 Comments – Post Your Own

#1) On April 18, 2010 at 3:02 PM, SockMarket (37.04) wrote:

good writeup wax, but why don't you want to own rails?

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#2) On April 19, 2010 at 4:59 AM, wax (97.31) wrote:

Daniel;

Thank you for your comments.

In answer to your question, consider what Foster does. They are a picks and shovels company. What good is Mr. Buffett's railroad purchase without a company like LB Foster?

While it isn't that we dislike railroad company's, it's just that from an investment risk perspective, we would prefer a picks and shovels company.

Think of it this way. During the gold rush days, who made money? The miners or the guy selling the picks and shovels?

Wax

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