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Here's Why Steel Dynamics Looks Like an Impressive Long-Term Investment

August 20, 2014 | About:
kcpl

kcpl

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Steelmaker and metal recycler Steel Dynamics (STLD) released fantastic results for the second quarter. The company came up with strong results, posting good improvements in profit and the top line. This tremendous growth came as a result of a sharp growth in all its segments.

However, Steel Dynamics was under pressure previously due to harsh weather conditions, but a good comeback in the previous quarter indicates that the company has further room for financial and operational improvement. Further, the company is expecting to see better growth opportunities from the strategic acquisition of the Severstal Columbus steel mill. Let us take a closer look at Steel Dynamics’ underlying business.

A strong performance

Steel Dynamics’ quarterly revenue grew 15% to $2.07 billion. The company saw a good improvement across all its segments, which helped it beat consensus estimates on the earnings front. Steel Dynamics reported EPS of $0.31, beating consensus estimates. Analysts had been modeling $0.30 per share.

The fantastic results in the second quarter are a clear evidence of the company's momentum. Further, Steel Dynamics is in position to move ahead by focusing on many profitable aspects. The strategic move to acquire Severstal Columbus Steel Mill is one such step. Steel Dynamics is expecting this plant to increase its annual steel shipping capacity by 40%. With this, the company will have a better exposure to the market and will also drive in more revenue.

Steel Dynamics sees strong potential in markets in the South Eastern region and Mexico. It is seeing significant growth opportunities in these regions. Steel Dynamics is aligning its operations toward exploring these regions, which will help it maintain a prudent credit profile.

Positioned for growth

Steel Dynamics has a strong business model. According to management, it is because of its strong business model that the company’s segments were able to gain momentum after bad weather conditions that affected its business.

The company is seeing positive signs from the U.S. economy. It is seeing good growth in the non-service sectors, which will surely help the GDP to rise. Steel Dynamics is also optimistic about growth in the automotive sector, which is expected to boom in the days to come. This will give enormous opportunity to companies such as Steel Dynamics as the demand for steel will rise.

Also, according to a recent survey, the June consumer sentiment index was strong. In addition, the U.S. energy and oil industries remain among the brightest areas of growth for Steel Dynamics, as it is a significant contributor to overall steel consumption in the U.S. On the other hand, the oil rigs in the U.S. are also improving. Besides this, manufacturing and construction industries in the U.S. are also moving at a good pace and are expected to give good opportunities to Steel Dynamics to deliver far better results in the future.

Moving on, Steel Dynamics is seeing growth in railroading, which will in turn improve steel demand. In addition, the company is also working closely with Class I railroads through the qualification of premium rail. Its premium rail quality steel is gaining good traction.

Steel Dynamics’ fabrication business is also doing well, as the company is seeing good growth in the book-to-bill ratio for joist shipments. Joist shipments have significantly increased by a good 30%, and if this momentum continues, the company is expected to gain good market share by strengthening its national footprint.

Conclusion

Steel Dynamics can be a good long-term holding, as its earnings are expected to grow at a good pace. However, for the short term, the company looks quite expensive with a trailing P/E of 27.17. But the forward P/E of 11.53 is a clear indicator of earnings growth in the future. Also, considering the growing U.S. economy and the growing demand for steel due to an improving automotive segment, the long-term prospects of Steel Dynamics look promising. Hence, investors should consider investing in the stock as it looks well-positioned for the long run.


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