Based in Fort Wayne, Indiana, Steel Dynamics, Inc. (NASDAQ:STLD). is the largest carbon steel producer in the United States. Flat-rolled and sheet steel comprise more than sixty percent of company’s steel shipments, while the rest consists of bars, beams and fabricated products.
Steel Dynamics’ Earnings
Steel Dynamics just released its earnings for 4Q12. The company reported earnings per share of $0.27 on revenues of $1.7 billion. Hence, earnings were $0.06 higher than 3Q12 and $0.14 more than the last quarter of 2011.
In the last quarter, operating profits from steel operations grew 7% to $8 million, thanks to a 4% increase in shipments. While the steel operations grew, the long products’ (bars & beams) shipments took a small dip. Steel operations’ operating profits per ton grew to $82 from $80 in the third quarter. In the case of fabrication, the company reported an operating profit of $2.1 million.
The steel mills operated at a 80% utilization rate, which was better than the third quarter but less than the 85% rate achieved during the first six months of 2012. The energy sector didn’t do that well amid low natural gas prices which affected the drilling rates. However, the automotive and manufacturing sector remained strong. In case of domestic metals recycling industry, operating profits grew by 56% from 3Q12. An increase in copper margins was one of the most crucial improvements, thanks to the increase in copper prices globally.
One of the key features of Steel Dynamics over the years has been its ability to cut down on costs. Furthermore, the company’s iron production in Minnesota would mean that it won’t have to rely on foreign pig iron in the coming years. The Minnesota operations and Iron Dynamics have now grown to such an extent that they can fully support the company’s steel production
Valuation
Steel Dynamics is currently trading at a forward P/E (1yr) of 9.47x and has a dividend yield of 2.60%. Using the steel industry’s average forward P/E of 10.4x, I would value Steel Dynamics as follows:
According to consensus estimates, Steel Dynamics should be trading at $17.16, showing an upside potential of almost 10%. Adding a dividend yield of 2.60% to this gives us a total return of almost 12.5%. Hence, I suggest buying Steel Dynamics.
Steel Industry’s Major Players
The world’s largest steelmaker in terms of sales and volume, ArcelorMittal (ADR) (NYSE:MT), reported a $4 billion loss in 4Q12. In 4Q11, the company had posted a loss of $1 billion. One of the major reasons behind this was its idle plants in Madrid, Spain, and Florange, France, and the closure of another plant in Liege, Belgium. According to the company, 2013 would be a far better year as the worst of economic downturn is over. Moreover, the company expects its shipments to grow by 2% to 3% as the global demand for steel is expected to increase by almost 3%. Currently, ArcelorMittal is trading at a forward P/E (1yr) of 10.5x and is yielding a strong dividend of $3.90. Using an average forward P/E of 10.4x for the steel industry, I value ArcelorMittal at $16.2; therefore, it’s trading at its fair value. Hence, I remain neutral on ArcelorMittal.
