Why Steel Dynamics Can Be Bought on the DropSTLD) trades at the lower end of its 52-week range as the stock has declined over 15% this year. This is not surprising if we consider that the steel market in North America has been under pressure due to cheap imports from abroad.
This was a key reason why Steel Dynamics’ financial performance was down last quarter as compared to last year, with the company reporting a decline in revenue and swung to a loss as compared to a profit last year. However, Steel Dynamics is focusing on the long run as the prospects of the steel market in North America look strong as the construction and automotive sectors grow.
Making positive moves
Steel Dynamics is focused on expanding its fabrication operations by strategically purchasing some of the major steel decking facilities and net working capital of approximately $30 million of Consolidated Systems, Inc. at an all in cash purchase price of $45 million. These assets are expected to be included in the fabrication operations of the company through its completely owned subsidiary, New Millennium Building Systems.
The planned acquisition of new assets from Consolidated Systems highlights the robustness of Steel Dynamics balance sheet which is further strengthened by the fact that the company is offering attractive investor returns.
The domestic steel consumption is majorly gauged by the growth in the construction industry. The construction industry has remained a major single domestic steel consumption segment in the past and it is believed to further grow during this year. Also, the company’s fabrication operations recorded superior profitability during the second quarter of 2015. The non-residential construction market is also growing at an accelerated pace with significant bookings and order inquiries which is further stabilizing the product pricing.
Importantly, Steel Dynamics delivered robust operating cash flows of $309 million in the second quarter 2015, depicting a 32 percent expansion over the consecutive quarter and in line with its continued commitment to deliver outstanding shareholder returns.
The accelerated steel demand from the construction industry is forecasted to deliver solid top line growth for Steel Dynamics and strengthen its financial position to drive impressive prospective growth while delivering attractive investor returns.
The excessive imports for the quarter resulted in further contraction of the metal spread, leading to a more rapid decline of steel product pricing compared to scrap raw material costs. The average product selling cost for Steel Dynamics steel operations declined in the range of $101 to $662 per ton. In addition, the average ferrous scrap cost per ton melted fell in $57 to $255 per ton range.
The significant 24 percent growth in Steel Dynamics flat roll shipments was partially offset by a meaningful decline in metal spread due to the flat roll products being hugely and negatively impacted by greater import volumes and present elevated customer inventory levels. Further, the steel production utilization rate of Steel Dynamics regained hugely to 87 percent in the second quarter 2015, allowed by a greater demand for flat rolls and thus their elevated volumes.
A look at Steel Dynamics’ valuation further indicates that the stock could be a good long-term buy. It has a PEG ratio of 0.99, while the difference between the trailing P/E ratio of 39.82 and forward P/E ratio of 9.19 indicates that the bottom line will improve in the future. Hence, I think that it will be a good idea for investors to capitalize on Steel Dynamics’ drop this year and buy it for the long run.
Published on Sep 27, 2015By Vinay Singh