A look at performance
Sluggish Chinese growth and weak demand from Europe have put pressure on the steel industry. In addition, low prices for sheet and structural steel are also adding to the weak performance of most steel companies.
As a result of the weakness, Steel Dynamics’ revenue fell 6% year-over-year to $1.8 billion and marginally beat consensus estimates of about $1.8 billion. Production took a hit as well due to increased imports of steel coupled with domestic oversupply in the reported quarter.
Steel Dynamics, Inc. (NASDAQ:STLD) reported quarterly earnings of $0.13 per share, which was inline with consensus estimates, so it did fairly well on this front; more so if we look at how another steel maker, Schnitzer Steel Industries, Inc. (NASDAQ:SCHN), witnessed a complete meltdown of its earnings and revenue. Things do not look so bad for Steel Dynamics, Inc. (NASDAQ:STLD), in my opinion.
Looking ahead
Steel Dynamics, Inc. (NASDAQ:STLD) is expecting continued demand for high-quality steel from the automobile industry, the manufacturing sector and residential construction in 2013. It is also looking at improvements in the engineered special-bar quality products and fabrication shipments. The company is also on track to complete its organic growth projects, like the capacity expansion of engineered special-bar-quality and the premium rail addition. Both of these initiatives would go a long way towards increasing its higher margin product mix and result in earnings growth.
Mesabi is expected to hit and maintain an annualized production rate of 360,000 tons (30,000 tons per month) by year-end. Next year’s performance is expected to improve further to an annualized rate of 400,000 tons to 450,000 tons (33,000 tons to 35,000 tons per month). Once the monthly production surpasses 30,000 tons, Mesabi is expected to break even and start generating profits by year-end.
The automotive market remains “strong” and this is something that all steel producers, even those that aren’t profitable right now, are banking on to work as a catalyst for their turnaround in the future. This is in addition to a sustainable recovery in residential construction, which, however, is expected to be dampened by a recent hike in mortgage rates.
On the back of a strong second quarter, Steel Dynamics still has positive cash flow, but this is something that it has to keep a close watch on. So far in the current year it has burned through $32.2 million in cash, implying it is consuming cash more than it is generating.
Steel Dynamics, Inc. (NASDAQ:STLD)’ mini-mills are more labor and energy efficient as compared to other integrated-steel companies. Also, it’s one of the best vertically integrated companies in the business. In addition, its mills are strategically placed in close proximity to both raw-material sources and consumers of finished goods, thereby offering cost advantages as far as transportation costs are concerned.
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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