Steel Dynamics' (STLD, Financial) revenue in the previous quarter rose 12% from a year ago period to $2.05 billion, while earnings adjusted for call premium charges and other finance expenses came at 17 cents a share. The revenue growth is encouraging, but the profits were affected by lower steel prices coupled with higher costs. But the company is working on this front and we could see some positive results in the days ahead.
Overcoming the challenges
Drop in oil prices is a headwind that weighed on financials. Although, Steel Dynamics in itself has only 8% exposure to this sector but its recently acquired Columbus flat rolls steel mill was considerably affected from the reduced steel consumption in the energy sector.Ă‚
When Steel Dynamics closed the Columbus deal last year, the oil price decline had already started. Therefore its first order of business after acquisition was to diversify its business, making a broader mix of value-added product lines serving more industries. Its efforts are on, as the management is making tremendous progress in diversifying to automotive from construction related products. This is the right thing to do and will benefit the company in the long run.
Along with this, it will also focus to improve Columbus’ operational efficiency in order to reduce costs, while maintaining the required product quality standards. During the quarter its SG&A expenses increased by $6.3 million, which negatively affected its bottom line. Its efforts to improve operating cost could yield good results in the future with improved profitability.
Apart from this the company sees huge potential in steel used for rail road construction. Steel Dynamics’ strength lies in identifying niche segments and catering to their need. In this direction, the weld capability of its 320-foot rail length is far better than the 80-foot rail. It provides its customers with a high quality product that has three-fourths fewer welds, which consequently improves safety by reducing the number of joints.
Not only this, longer rail also requires less maintenance than the conventional ones. These benefits provide Steel Dynamics an edge over its peers to compete in the domestic market. Based on railroad investment forecasts, the management anticipates that the domestic rail consumption will increase during the next three years to five years. So even if the oil prices remain weak this could offset its negative effects.
Conclusion
All in all Steel Dynamics looks poised for growth and its strategies in the wake of weak energy pricing seem good. Moreover, its forward P/E multiple of 11.57 is impressive compared to a trailing P/E of 35.11, which indicates further growth in earnings. Therefore considering these factors Steel Dynamics seems to be a good long term bet.
