Steel Dynamics, Inc. (STLD), Nucor Corporation (NUE): Stay Away From This Steel Stock

Others in the industry

Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) is an ore-based steel producer, and its second-quarter results revealed what we can say is a near “smelt down.” The steel producer logged a profit of a mere $0.03 per share, which was a decline of 93% year-over-year. If we do not consider the restructuring charges of $2 million, earnings work out to $0.09 per share, which missed consensus estimates of $0.19 per share by a huge margin.

Revenue slipped 19% year-over-year and missed consensus estimates by $55 million. This is a typical case of a company exposed to overseas markets to the tune of 40% of revenue, with its main markets being Europe and Asia. Europe, as we all know, is going through a slump, and China’s growth story is witnessing a slowdown. Both taken together had a very adverse impact on the company.

Nucor Corporation (NYSE:NUE) is the largest steel maker in the U.S., based on the same mini-mill model of Steel Dynamics. It reported earnings of $0.27 per share and missed consensus estimates of $0.30 by 10%. Although revenue declined 8.3%, it did beat consensus estimates by a very thin margin of $19 million, bringing in approximately $4.7 billion.

The company has a tight control on capital spending, and thereby is generating a large amount of cash for financing activities. Nucor Corporation (NYSE:NUE) does expect 3Q 2013 to show modest improvements in earnings. For dividend investors, Nucor Corporation (NYSE:NUE) has a healthy 3.1% yield. The company is expecting an increase in prices to improve earnings, but oversupply from cheap Chinese producers will continue to weigh on its results.

Conclusion

The steel industry is overall in bad shape due to depressed prices and oversupply from abroad. But the uptick in the construction and auto sectors could bring some relief. But even then, high mortgage rates can again spoil the party and lead to weaker performances in the future. Investors are advised to stay away from steel stocks such as Steel Dynamics, Inc. (NASDAQ:STLD) right now, and an expensive trailing P/E of 23x justifies my stance.

The article Stay Away From This Steel Stock originally appeared on Fool.com and is written by ANUP SINGH.

ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Nucor. ANUP is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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