Steel Dynamics Inc (STLD, Financial) experienced a daily gain of 2.41%, and a 3-month gain of 8.77%. The company reported an Earnings Per Share (EPS) of 17.15. But is the stock fairly valued? We delve into a valuation analysis to answer this question, providing valuable insights into the company's financial health and future prospects. Let's explore.
Company Introduction
Steel Dynamics Inc operates scrap-based steel minimills, boasting an annual steel production capacity of approximately 16 million tons. The company's operations are segmented into steel operations, metals recycling operations, and steel fabrication operations. The steel operations segment is the primary revenue generator. The company's stock price stands at $104.77, while the GF Value, an estimation of the fair value, is $100.3, suggesting that the stock is fairly valued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from GuruFocus's exclusive method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. This calculation is based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
According to GuruFocus Value calculation, Steel Dynamics stock is fairly valued. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $104.77 per share and the market cap of $17.40 billion, Steel Dynamics stock is believed to be fairly valued. As Steel Dynamics is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it's crucial to review the financial strength of a company before deciding to buy its stock. A good starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage. Steel Dynamics has a cash-to-debt ratio of 0.68, better than 64.32% of companies in the Steel industry. GuruFocus ranks the overall financial strength of Steel Dynamics at 8 out of 10, indicating that the company's financial strength is robust.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Steel Dynamics has been profitable for 9 out of the past 10 years. Over the past 12 months, the company had revenues of $20.50 billion and an EPS of $17.15. Its operating margin of 18.96% is better than 92.1% of companies in the Steel industry. Overall, GuruFocus ranks Steel Dynamics's profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Steel Dynamics is 36.5%, which ranks better than 91.61% of companies in the Steel industry. The 3-year average EBITDA growth rate is 70.6%, which ranks better than 89.35% of companies in the Steel industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Steel Dynamics's ROIC is 29.54, and its cost of capital is 11.53.
Conclusion
In conclusion, the stock of Steel Dynamics (STLD, Financial) is believed to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 89.35% of companies in the Steel industry. To learn more about Steel Dynamics stock, you can check out its 30-Year Financials here.
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