Common Stock: Fras-le (FRAS3)
Current Market Price: R$ 5.99
Market Capitalization: R$ 1.3 billion
*All values in this article are expressed in Brazilian Reais (BRL) unless otherwise noted.
**The bulk of this analysis is based on the company’s most recent audited financial report, which can be found by following this link.
Fras-le Stock – Summary of the Company
Fras-le is a Brazilian automotive parts manufacturer. Their main product line is focused on braking systems, for example brake linings, but they also manufacturer other automotive parts such as transmissions and suspensions, among others. The company has 9 factories around the world and serves customers in 120 countries. They currently have around 4,000 employees. Fras-le was founded in 1954 and is headquartered in the state of Rio Grande do Sul, Brazil.
Revenue and Cost Analysis
Fras-le had total revenue of R$ 1.4 billion in 2019, an increase from R$ 1.1 billion in 2018. Their COGS in 2019 was R$ 1 billion, representing a gross margin of 26%, equal to their gross margin in 2018. The company was profitable in both 2019 and 2018. Net income was R$ 32.8 million in 2019 representing a profit margin of 2.4%. This represents a significant decrease from 2018 when the company had a profit margin of 7.7%.
Balance Sheet Analysis
Fras-le has an OK balance sheet. They have a solid base of assets and sufficient liquidity in the near term. However debt denominated in foreign currency is a concern.
Fras-le – Debt Analysis
As of year-end 2019 the company has R$ 392.5 million in debt outstanding, R$ 117.8 million of which is classified as current. 79% of the company’s debt is denominated in US dollars with the remainder denominated in Brazilian Reais, exposing the company to the negative effects of a depreciating Brazilian Real.
Fras-le Stock – Share Dynamics and Capital Structure
As of year-end 2019 Fras-le has 217.5 million common shares outstanding. 51% of the company’s shares are owned by Randon SA, a Brazilian conglomerate focused on the automotive industry. Several institutional investors own around 28% of the company, with around 19% of the company’s shares being owned by smaller investors with an ownership position of less than 5%.
Fras-le Stock – Dividends
The company paid total dividends of R$ .26 cents per share in 2019. At the current market price this represents a dividend yield of 4.4%.
Fras-le Stock – 3 Metrics to Consider
Debt to Equity Ratio
Total Liabilities/Total Share Holder Equity
R$ 840.7 million / R$ 779.3 million = 1.07
A debt to equity ratio of 1.07 indicates that Fras-le uses nearly equal amounts of debt and equity in its capital structure and is not overly reliant on either form of financing.
Working Capital Ratio
Current Assets/Current Liabilities
R$ 730.2 million / R$ 341.8 million = 2.1
A working capital ratio of 2.1 indicates a sufficient liquidity position. Fras-le should not have a problem meeting its near term obligations.
Price to Book Ratio
Current Share Price/Book Value per Share.
R$ 5.99 / R$ 3.58 = 1.7
Fras-le has a book value per share of R$ 3.58. At the current market price this implies a price to book ratio of 1.7, meaning the company’s stock currently trades at a slight premium to the book value of the company.
Fras-le Stock – Summary and Conclusions
Fras-le is a solid company. They have a large international footprint and are in a decent position financially, having been profitable in both 2018 and 2019. However 79% of their debt is denominated if US dollars, the exposing them to the negative effects of a depreciating Brazilian Real.
Although I like the company, I am not willing to invest in companies with large exposure to the US dollar carry trade. I also am not comfortable investing in the automotive industry given that I haven’t owned a car in nearly a decade. I will revisit Fras-le stock when their 2020 financials are published to see how their US dollar debt position has evolved. I will compare the company to other Brazilian manufactures with an international presence such as Metalfrio and Iochpe-Maxion.
Disclaimer
This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.
This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.
