Company:

Foster LB (FSTR)
Submitted By:
Charles Winnick (Matrix Capital Management) on Oct 29, 2010 at 06:00PM
Asset Class:
Common Equity
Recommendation:
Long
Expected Timeframe:
6 months to one year
Geography:
North America
Country:
United States
Situation:
Growth

Thesis
About L.B. Foster (FSTR)

L.B. Foster is a leading supplier to the rail (50%), construction (45%) and energy and utility markets (5%). It produces products such as
rail ties, rail joints, steel sheet pilings and natural gas piping.

The demand for rail products and development is extremely high, with the US Department of Transportation estimating that the demand
for cost-effective and environmentally-friendly freight rail transportation will grow 88 percent by 2035. This requires the rail industry to
invest heavily in network infrastructure and capacity, both of which are sectors which Foster is well-positioned to take advantage of.

The 3rd quarter results for FSTR have been highly favorable, with Fosters reporting net sales increase of 9.4% for the first nine months
of 2010 compared to the previous year, and a gross profit margin increase of 16% as compared to the same period.

FSTR’s operating results have historically been very highly correlated with Class 1 railroad capex, which is picking up as we enter a
multi-year upgrade cycle for rail infrastructure investment The record backlog in orders that FSTR picked up in Q2 point to strong
expected demand for rail infrastructure development, reinforcing our analysis that FSTR will experience further net sales growth.

PRPX Merger

In February 2010, Foster announced its intent to acquire one of its top competitors, Portec Rail Products (PRPX) for $11.71, a 4%
premium above PRPX’s closing price. Following the announcement, FSTR share shot up >20% as investors recognized the synergies
inherent in the deal. However, the stock was subsequently sold off due to a preliminary injunction by the Court of Common Pleas of
Allegheny County. The court has since lifted the injunction and the merger is expected to be completed by the end of the year.
In August, the firms agreed to an extension of the tender date of all outstanding shares to Nov 15, 2010 and an increase in the tender
offer to $11.80 from $11.71. As well, Foster agreed to pay PRPX $2m should the transaction not be completed by 12/31/10.

The primary obstacle to the acquisition is DOJ anti-trust concerns. However, if Foster can successfully divest assets related to Portec’s
Huntington, WV facility, the firm believes that the DOJ should approve the deal. Foster announced in its 3rd quarter conference call that
they are in the process of holding an auction for this facility. 
The material significance of this sale on the overall portfolio worth of Portec will not significantly impact the strong synergies we expect
to observe in future quarters, thus reaffirming our earlier analysis that Foster will experience strong performance as a result of this
merger.

Based on these estimates, and our own forward-looking assumptions, we expect Foster to maintain future diluted EPS approximately
50% above its current trading value. Crucially, we are looking at 2011E EPS of $3.07 versus the current $1.93 consensus, which seems
to be ignoring the upside potential of the merger with PRPX. 
In the immediate term however, we are looking at a 10-20% upside to the stock price for FSTR, pursuant to the successful closure of the
deal with PRPX.

Variant View
We have not paid much attention to the variant view with regards to FSTR, primarily due to the low
possibility that the merger with PRPX will collapse, which is the main threat to the current stock price. Global
steel prices, another potential threat, also do not seem to have affected the profit margins for FSTR either,
suggesting that FSTR is adequately hedged against steel price variations, and profit margins are determined
by core business fundamentals more than external factors.

Our main point for the higher margins relative to the forecasts on the ground are the lowered opex that we are forecasting for FSTR post-
merger with PRPX, given the synergies of the deal involved.

Valuation Metrics
(Units in millions, except for per share data or if otherwise noted.)
Trading Statistics
Stock Price 33.37
Price target 51.71
% premium / (discount) to target (35.5%)
Shares outstanding - diluted 29.9
Market Cap 997.8
Cash + short-term investments 144.2
Debt 2702.0
Minority Interest 0.0
Enterprise value 3555.6
Annual Dividend per Share 0.0
% yield 0.0%
Projected 2010 EPS growth % 0.0%
Valuation Multiples Data Multiple
P/
EPS LTM 1.83 18.2x
EPS 10E 2.09 16.0  
Trading Statistics
EPS 11E 2.42 13.8  

2010 PEG Ratio 0.0x

EV /
EBITDA LTM 0.0 N/A
EBITDA 10E 0.0 N/A
EBITDA 11E 0.0 N/A
FCF LTM 0.0 N/A
FCF 10E 0.0 N/A
FCF 11E 0.0 N/A
Valuation Multiples Data Multiple
EV /
Sales LTM 424.6 8.4x
Sales 10E 456.5 7.8  
Sales 11E 499.3 7.1  
P/
Book value 151.5 6.6x

Credit Statistics
Net debt / EBITDA LTM 0.0x
Total debt / EBITDA LTM 0.0  
Cash / share 4.82
Market cap / Debt 0.4x