MFRI: Down and Out in Illinois

| About: MFRI, Inc. (MFRI)

Clearly the US and its sovereign states are economically challenged today. Among the most desperate states are California, Nevada, Florida and Illinois. MFRI Corp (NASDAQ:MFRI), a Niles, Illinois company may be suffering from simple guilt by association.

MFRI is an industrial conglomerate. It reports in four segments:

1. Piping Systems – pre-insulated piping, both above and below ground to transport temperature sensitive fluids such as petroleum and water.

2. Filtration Products – custom designed industrial filtration to capture particulate from industrial exhaust.

3. Industrial Process Cooling Equipment – primarily heating & cooling systems.

4. Corporate & HVAC – small HVAC unit, consolidated under corporate.

Revenue by Segment (Trailing 4 quarters in millions of $):

1. Piping Systems $104

2. Filtration Products $77

3. Industrial Process Cooling Equipment $22

4. Corporate & HVAC $10

Total Revenues $212

The dual leadership team of David Unger and Brad Mautner, long time executives and significant shareholders, has a unique global business attitude. In addition to operations in the US and Canada, they also service Europe, India and the Middle East. They recently expanded their Gulf Cooperation Counsel (GCC) presence to include both the United Arab Emirates and Saudi Arabia.

Executive management provides a high degree of autonomy to divisional managers who are motivated to act in an entrepreneurial manner in order to grow their segment. Each manager is given great flexibility to manage his group for maximum profit – incentive compensation is based on performance. Corporate is responsible for capital allocation decisions. This arrangement is similar to Berkshire Hathaway’s (NYSE:BRK.A) economic model.

The company is positioned across the world, but has particular focus on emerging markets such as India and the Middle East – where there are tens of billions of dollars of infrastructure development projects under way. Management and labor are often sourced in local markets, thus remaining attuned to area customs and business practices.

MFRI may even be exploring opportunities in Northern Africa. Management is proven to be very opportunistic.

In late 2009 MFRI formed a joint venture with an existing customer to acquire a Canadian piping business. The acquisition gives MFRI a unique strategic position to participate in the Canadian tar sands development. Their new customer relations create additional cross selling opportunities as well. MFRI has yet to report the net impact of this venture, however, earnings should be evident this calendar year.

The company generated over $210 million in revenue in 2009. They remained profitable throughout the 2007-2009 down turn as a consequence of cost reduction initiatives and global diversification. Sales peaked at over $300 million during the downturn. Given its currently expanded footprint and customer base, the company can exceed prior peak revenues with moderate global economic improvement.

The company’s order backlog has passed trough levels. Recently reported backlog showed an increase quarter over quarter of 17.4% and currently stands at $86 million. This was in part due to a new Indian contract to lay an additional 93 miles of insulated pipeline for long distance oil transit. This project compliments the previously completed 370 mile pipeline project. Additional contract work may be forthcoming.

Given estimated sales of $300 million, earnings per share would conservatively range between $1.30 and $1.75 given historic net margins of 3% - 4%.

Total debt is just $39 million, leaving them with a moderate 28% debt to capital ratio.

Tangible shareholder equity is $10.60 per share as of April 30, 2010.

Executive management has a vested financial interest due to their eighteen percent equity ownership in company stock. However, company control remains in the marketplace.

Non-US global economic recovery is under way and will become self sustaining in time. Controlling assets beyond US boarders will be a critical competitive advantage in the future, even more so than in the past due to the United States shrinking importance as a global economic engine of consumption. MFRI has and will continue to exploit foreign market opportunities as well as their current domestic business.

Through dexterous management, they have maintained profitability. It is likely management’s ongoing efforts will yield future profits as well. At some point, share price will reflect business value.

Disclosure: Long MFRI; The security described in this article is owned by the contributor and clients of Milwaukee Private Wealth Management, Inc., an investment management firm owned by the contributor. Thus, the contributor has a financial interest in any future price increase of the security.

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