We came across a bullish thesis on Worthington Steel Inc (WS) on ValueInvestorsClub by frankie3. In this article we will summarize the bulls’ thesis on WS. Worthington Steel shares were trading at $29.70 when this thesis was published, vs. closing price of $36.85 on Sep 18.
An industrial setting with an array of stainless steel pipes and connections with workers in the background.
Worthington Steel (WS) emerged as a distinct entity following its spinoff from Worthington Industries (WOR) in December 2023. This strategic separation aimed to unlock the higher-margin potential of Worthington Enterprises while allowing WS, the steel processing segment, to focus on its core operations. While WS may initially appear as a “cigar butt” investment due to its perceived volatility linked to commodity steel prices, it is in fact poised for growth, driven by significant secular trends in electric vehicles (EVs) and electrification infrastructure.
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WS is a premier value-added steel processor in North America, specializing in flat-rolled steel products, tailor-welded blanks, and electrical steel laminations. Its operations span several end markets, with automotive being the primary revenue driver, closely tied to new car production. Additionally, WS serves diverse sectors including construction, energy, agriculture, and trucking, highlighting its broad market appeal.
One of the standout aspects of WS is its strong position in the electrical steel market, where it is recognized as one of the largest global producers of electrical steel laminations. These products are increasingly vital as industries transition toward renewable energy and electric infrastructure. With governments committing to substantial infrastructure spending, WS is well-positioned to benefit from this growth. The company’s product lines, particularly those geared toward the automotive sector, focus on lightweighting vehicles—an essential requirement for modern car manufacturing, especially with the rise of EVs.
While current market conditions present earnings headwinds due to declining steel prices, WS’s long-term growth potential is underpinned by its strategic shift toward high-margin electrical steel products. Analysts project that this shift could substantially enhance the company’s profitability, allowing it to target an EBITDA margin exceeding 10%. With its current valuation at just 8.8 times earnings and 7.7 times free cash flow, WS represents an attractive risk-reward scenario for investors looking for value in the steel sector.
Financially, WS is in a strong position with a conservative balance sheet, maintaining only about $90 million in net debt. Its operations, primarily based in the U.S., also benefit from deep connections to the manufacturing industries in the rust belt, where traditional steel processing remains vital. The company’s operational flexibility allows it to scale between direct sales and toll processing, further optimizing its response to market demands.
The potential for value creation is substantial, as evidenced by the comparison with Reliance Steel, a larger player in the sector that enjoys better margins and higher valuations. Currently, Reliance Steel trades at 16 times PE and 12 times EV/EBITDA, while WS is priced much lower, reflecting a significant valuation gap. If WS successfully achieves its targeted EBITDA margins, it could close this gap substantially, resulting in an estimated target price of $41 per share—a 37% upside from current levels.
However, investors should be mindful of the risks involved. Steel prices, driven by global demand and trade policies, significantly impact earnings. Additionally, with approximately 50% of sales directed toward the automotive sector, disruptions in the industry—such as potential strikes—could pose challenges. Nonetheless, WS’s focus on high-margin products and diversified end markets provides a robust framework for navigating these risks.
In conclusion, Worthington Steel offers a compelling investment opportunity due to its unique positioning in the steel processing market, exposure to growth sectors, and attractive valuation metrics. As the company continues to pivot towards higher-margin electrical steel products and capitalizes on secular trends, investors may find significant value in WS as it carves out its niche in an evolving industry landscape.
WS is not on our list of the 31 Most Popular Stocks Among Hedge Funds. While we acknowledge the potential of WS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as WS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.