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.
Talking about the steel industry, Nucor Corporation (NYSE:NUE) still remains one of the best buys in the industry. Despite the fact that the steel industry didn’t have a good year (2012), Nucor performed well above par during the last year. It’s yielding a dividend of 3.10%, which is one of the best in the industry. Moreover, its 4Q12 results clearly show that it has a lot of cash on hand; hence, it would continue with its old policy of increasing dividends for its shareholders. Furthermore, it’s earning revenue per share and cash per share of $61 and $3.63, respectively. Earning operating margins of 5.45% in this sluggish industry isn’t a piece of cake either. In short, I definitely recommend buying Nucor. You can have a further look at my detailed take on Nucor here.
Conclusion
In 2013 and 2014, one of the biggest catalysts for Steel Dynamics will be the U.S. economy. Steel Dynamics’ beta of 1.68 clearly suggests that it’s a hugely cyclical company. With the U.S. economy and the steel industry slowly getting back on track, Nucor is certainly expected to do well in the coming years. Over the past few years, the government has been keen on increasing imports in the steel industry, which has negatively impacted the local U.S. industry. However, the encouraging news came in late 2012 – steel imports were down 13.9% from November to 2.3 million tons in December. As far as steel production is concerned, Steel Dynamics would be self sufficient in the years ahead amid Iron Dynamics and Minnesota operations, which in turn means a further reduction in costs of production. Moreover, the new iron concentrate facility, which started off in September, 2012, would be vital in reducing the input costs associated with the iron nugget facility. The bottom line is that Steel Dynamics still remains a good buy for the long run. Hence, we recommend buying Steel Dynamics for long term gains.
The article Don’t Miss out on This Steel Stock originally appeared on Fool.com and is written by Waqar Saif.
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