Steel Dynamics (STLD, Financial) followed in the footstep of its peers with the stock nearing its 52-week low a few days back. Even as macroeconomic factors weighed on its performance, a lower than expected fourth quarter result further sank its shares. In the wake of a challenging U.S steel market, how long the company can hold on is the question.
The quarterly performance and more
Its revenue for the quarter rose 35% from a year ago period to $2.5 billion, while it reported a loss of 19 cents per share compared to a profit of 25 cents last year. It was mainly on account of the impairment charges related to its Minnesota operations. Excluding that, the company earned a profit of 40 cents a share during the three months period.
Like every other steel company in the U.S, Steel Dynamics is severely affected by aggressive imports, yet the management is pleased with the numbers it achieved for the entire year. In fact, if we exclude the impairment charge in the fourth quarter and the acquisition costs related to Columbus during the year, its net income rose 71% on year over year basis. This clearly reflects the improving fundamentals of the company.
Reading the signs
In addition, there are mild signs of increasing steel demand in the U.S, which if true will bolster its growth significantly. During the year it was observed that in spite of an increase in imports, domestic steel production utilization remained more or less the same between 77% and 78%, which is a clear indication that the steel demand is on the rise. Yet, it will be a matter of time to find out whether the demand has changed or not.
Steel Dynamics is undertaking all initiatives on its part that would drive its top line. The addition of premium rails to its product portfolio is one step in this direction that will position the steel maker to become the most prominent rail supplier in North America. Additionally, the capability to weld 320-foot length rail compared to the conventional 80-foot rail will prove as a strong competitive advantage.
It will provide its customers with a high-quality product with 75% fewer welds and also save their money by reducing maintenance cost and installation time. Based on railroad investment forecast the domestic rail consumption is expected to rise in the next three to five years, and these developments will help the company to bag various new orders. Going forward, the management intends to produce at least 300,000 tons annually. It will enhance its profitability as rail elicits a better profit margin than structural steels, while increased volume will minimize the cost.
Steel Dynamics is also counting on its new rolling mill, which produces high quality products. Considering the positive feedback from customers, it is confident to use the added 325,000 tons of capacity in the coming years. Moreover, the acquisition of Columbus provided a platform where it could utilize its core competencies. The deal complements its current product with further exposure to high-growth markets. It is also diversifying geographically in the Southeastern, U.S. and Mexican regions.
Conclusion
These initiatives will play a significant part to drive its top line in the days to come. With a trailing P/E of 29.42 and a forward P/E of 9.5, the company seems to be well on track to continue its growth momentum. However, the macroeconomic factors such as increasing imports are still a matter of concern for the U.S steel industry. It will be for the government to decide how it soothes its ailing steel industry. But for now, its initiatives are yielding good return and are expected to do the same in the coming years.
