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Category: Stock Market and Steel Dynamics
Date: 19 September 2019 Stock Price: $30.52 We take a look at the 2nd quarter earnings release of their 2019 fiscal year of Steel Dynamics, one of the largest steel producers and metal recyclers in the United States.
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About Steel Dynamics
Steel Dynamics is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with facilities located throughout the United States, and in Mexico. Steel Dynamics produces steel products, including hot roll, cold roll, and coated sheet steel, structural steel beams and shapes, rail, engineered special-bar-quality steel, cold finished steel, merchant bar products, specialty steel sections and steel joists and deck. In addition, the company produces liquid pig iron and processes and sells ferrous and nonferrous scrap.
Overview of Steel Dynamics' latest earnings report
The numbers we are interested in (for the quarter):
- Net Sales $2.277 billion (down from $3.090 billion from the same quarter of the previous year)
- Sales decreased by -26.3% over the last 12 months
- Cost of Sales: $2.349 billion (up from $2.438 billion for the same quarter of the previous year)
- Cost of revenues increased by 0.04% over the last 12 months
- Net income: $194.302 million (down from $362,449 million loss for the same quarter of the previous year)
- Diluted earnings per share: $0.87 (down from $1.53 for the same quarter of the previous year)
- Diluted weighted-average shares outstanding: 222.519 million (down from 236.945 million for the same quarter of the previous year)
- Dividend declared: $0.24 (up from $0.1875 for the same quarter of the previous year)
- Dividend yield: 3.14%
- Cash and cash equivalents: $972.561 million
- Cash and cash equivalents per share: $4.37
- Cash and cash equivalents makes up 14.3% of Steel Dynamics' market capital
- Cash and cash equivalents makes up 12.37% of Steel Dynamics' total assets
- Accounts receivable: $1.072 billion
- Accounts receivable makes up 13.64% of Steel Dynamics' total assets
- Stockholders equity in Steel Dynamics: $3.901 billion
- Stockholders equity per Steel Dynamics stock: $17.53
- Steel Dynamics is trading at 1.74 times its stockholders equity per share
- Cash generated from operations: $196 million
- Cash generated from operations per share: $0.88
Steel Dynamics' management commentary on the results and earnings guidance
FORT WAYNE, Ind., July 22, 2019 /PRNewswire/ -- Steel Dynamics, Inc. (NASDAQ/GS: STLD) today announced second quarter 2019 financial results. The company reported second quarter 2019 net sales of $2.8 billion and net income of $194 million, or $0.87 per diluted share. Comparatively, prior year second quarter net income was $362 million, or $1.53 per diluted share, with net sales of $3.1 billion. Sequential first quarter 2019 net income was $204 million, or $0.91 per diluted share, with net sales of $2.8 billion.
"Our second quarter 2019 consolidated operating income was $285 million and adjusted EBITDA $365 million," said Mark D. Millett, President and Chief Executive Officer. "The team delivered a solid second quarter performance in a challenging steel pricing environment. A weakening scrap price environment coupled with steel inventory destocking led to steel buying hesitancy. Despite these challenges, supported by the addition of United Steel Supply and the continued ramp-up of Heartland, our steel platform shipments improved. As underlying steel demand remains constructive and scrap prices have steadied, we have recently seen stabilization and improvement in flat roll steel prices, resulting in increased flat roll order activity and improved order backlogs. However, structural, merchant bar, and reinforcing bar steel pricing remain pressured from domestic and import market competition.
"Underlying domestic steel demand remains intact, and we are seeing continued positive activity across most of the steel consuming sectors, including automotive, energy and industrial customers. Additionally, as evidenced by our strong steel fabrication backlog, strength continues in non-residential construction."
The company generated strong cash flow from operations of $361 million during the second quarter 2019 and increased liquidity to $2.3 billion. The company paid cash dividends of $54 million and repurchased $93 million of its common stock during the second quarter 2019.
Second Quarter 2019 Comments
Second quarter 2019 operating income for the company's steel operations was $295 million, or six percent lower than sequential first quarter 2019 results. The decline in earnings resulted from metal spread compression which more than offset the three percent increase in overall steel shipments related to the ramp-up of the Heartland facility and the recent addition of United Steel Supply. The sequential earnings decline was primarily driven by lower shipments and product pricing within the company's long product steel operations. The second quarter 2019 average external product selling price for the company's overall steel operations decreased $23 sequentially to $879 per ton. The average ferrous scrap cost per ton melted at the company's steel mills decreased $22 to $316 per ton.
The company's steel processing locations (Heartland, Techs, United Steel Supply and Vulcan) represented 16 percent of the shipment mix in the second quarter 2019, compared to 13 percent in the sequential quarter and nine percent in the prior year second quarter. These locations use steel products as their primary raw material, and the associated steel procurement cost represented 18 percent of the steel operations cost of goods sold for the second quarter 2019, 15 percent for the sequential quarter, and nine percent for the prior year second quarter.
Second quarter 2019 operating income from the company's metals recycling operations decreased to $11 million, compared to $20 million in the sequential first quarter, as a result of both lower nonferrous shipments and ferrous selling values. Both prime and obsolete scrap indices fell almost $90 per gross ton from March to June 2019. As scrap flows started to slow based on lower procurement values, scrap pricing appears to have stabilized in July.
Second quarter 2019 operating income from the company's steel fabrication operations was a strong $31 million, or 49 percent higher than sequential first quarter results. Earnings improved as higher shipments and lower raw material steel input costs, resulted in expanded profit margins. The steel fabrication platform order backlog remains strong, and customers remain optimistic concerning non-residential construction projects.
Outlook
"Based on domestic steel demand fundamentals, we are constructive concerning second half 2019 North American steel market dynamics," said Millett. "We believe steel consumption will experience modest growth and will be supported by further steel import reductions and the end of steel inventory destocking. There have been recent trade actions that we believe could have a positive impact in further reducing unfairly traded steel imports into the United States, including coated flat roll steel, which could have a significant positive impact for Steel Dynamics, as we are the largest non-automotive flat roll steel coater in the U.S.
"In combination with our existing and newly announced expansion initiatives, we believe there are firm drivers for our continued growth. We are excited about our planned flat roll steel mill, and the anticipated long-term value creation it will bring through geographic and value-added product diversification. We plan for the new steel mill to have product capabilities beyond existing electric-arc-furnace flat roll steel producers today, competing even more effectively with the integrated steel model and foreign competition. We have targeted regional markets that represent over 27 million tons of relevant flat roll steel consumption, which includes the growing Mexican flat roll steel market. This facility should have a meaningful competitive advantage in those regions.
"We continue to strengthen our financial position through strong cash flow generation and the execution of our long-term strategy. We are well-positioned for growth and remain focused on delivering long-term shareholder value through organic and transactional growth opportunities," concluded Millett.
Quarter 3 2019 fiscal guidance released by Steel Dynamics on 17 September 2019 is shown below
FORT WAYNE, Ind., Sept. 17, 2019 /PRNewswire/ -- Steel Dynamics, Inc. (NASDAQ/GS: STLD) today provided third quarter 2019 earnings guidance in the range of $0.66 to $0.70 per diluted share. Comparatively, the company's sequential second quarter 2019 earnings were $0.87 per diluted share and prior year third quarter earnings were $1.69 per diluted share, which included charges related to fair value purchase accounting adjustments of $0.04 per diluted share and a tax benefit of $0.04 per diluted share.
Third quarter 2019 earnings from the company's steel operations are expected to decrease in comparison to sequential second quarter results. The reduced earnings are primarily related to lower profitability from the company's sheet steel operations, as shipments and average steel pricing declined in the quarter, more than offsetting lower scrap costs. Underlying domestic steel demand remains principally intact for the primary steel consuming sectors, with particular strength in construction.
Third quarter 2019 profitability for the company's metals recycling platform is also expected to decrease when compared to sequential second quarter results, as a result of declining ferrous and nonferrous commodity prices coupled with steady shipments. Third quarter 2019 earnings from the company's steel fabrication business are expected to improve from sequential second quarter results, due to higher shipments and steady metal spread, as demand remains strong. The company continues to experience strong steel fabrication order backlogs and customers remain optimistic concerning non-residential construction projects.
"Our second quarter 2019 consolidated operating income was $285 million and adjusted EBITDA $365 million," said Mark D. Millett, President and Chief Executive Officer. "The team delivered a solid second quarter performance in a challenging steel pricing environment. A weakening scrap price environment coupled with steel inventory destocking led to steel buying hesitancy. Despite these challenges, supported by the addition of United Steel Supply and the continued ramp-up of Heartland, our steel platform shipments improved. As underlying steel demand remains constructive and scrap prices have steadied, we have recently seen stabilization and improvement in flat roll steel prices, resulting in increased flat roll order activity and improved order backlogs. However, structural, merchant bar, and reinforcing bar steel pricing remain pressured from domestic and import market competition.
"Underlying domestic steel demand remains intact, and we are seeing continued positive activity across most of the steel consuming sectors, including automotive, energy and industrial customers. Additionally, as evidenced by our strong steel fabrication backlog, strength continues in non-residential construction."
The company generated strong cash flow from operations of $361 million during the second quarter 2019 and increased liquidity to $2.3 billion. The company paid cash dividends of $54 million and repurchased $93 million of its common stock during the second quarter 2019.
Second Quarter 2019 Comments
Second quarter 2019 operating income for the company's steel operations was $295 million, or six percent lower than sequential first quarter 2019 results. The decline in earnings resulted from metal spread compression which more than offset the three percent increase in overall steel shipments related to the ramp-up of the Heartland facility and the recent addition of United Steel Supply. The sequential earnings decline was primarily driven by lower shipments and product pricing within the company's long product steel operations. The second quarter 2019 average external product selling price for the company's overall steel operations decreased $23 sequentially to $879 per ton. The average ferrous scrap cost per ton melted at the company's steel mills decreased $22 to $316 per ton.
The company's steel processing locations (Heartland, Techs, United Steel Supply and Vulcan) represented 16 percent of the shipment mix in the second quarter 2019, compared to 13 percent in the sequential quarter and nine percent in the prior year second quarter. These locations use steel products as their primary raw material, and the associated steel procurement cost represented 18 percent of the steel operations cost of goods sold for the second quarter 2019, 15 percent for the sequential quarter, and nine percent for the prior year second quarter.
Second quarter 2019 operating income from the company's metals recycling operations decreased to $11 million, compared to $20 million in the sequential first quarter, as a result of both lower nonferrous shipments and ferrous selling values. Both prime and obsolete scrap indices fell almost $90 per gross ton from March to June 2019. As scrap flows started to slow based on lower procurement values, scrap pricing appears to have stabilized in July.
Second quarter 2019 operating income from the company's steel fabrication operations was a strong $31 million, or 49 percent higher than sequential first quarter results. Earnings improved as higher shipments and lower raw material steel input costs, resulted in expanded profit margins. The steel fabrication platform order backlog remains strong, and customers remain optimistic concerning non-residential construction projects.
Outlook
"Based on domestic steel demand fundamentals, we are constructive concerning second half 2019 North American steel market dynamics," said Millett. "We believe steel consumption will experience modest growth and will be supported by further steel import reductions and the end of steel inventory destocking. There have been recent trade actions that we believe could have a positive impact in further reducing unfairly traded steel imports into the United States, including coated flat roll steel, which could have a significant positive impact for Steel Dynamics, as we are the largest non-automotive flat roll steel coater in the U.S.
"In combination with our existing and newly announced expansion initiatives, we believe there are firm drivers for our continued growth. We are excited about our planned flat roll steel mill, and the anticipated long-term value creation it will bring through geographic and value-added product diversification. We plan for the new steel mill to have product capabilities beyond existing electric-arc-furnace flat roll steel producers today, competing even more effectively with the integrated steel model and foreign competition. We have targeted regional markets that represent over 27 million tons of relevant flat roll steel consumption, which includes the growing Mexican flat roll steel market. This facility should have a meaningful competitive advantage in those regions.
"We continue to strengthen our financial position through strong cash flow generation and the execution of our long-term strategy. We are well-positioned for growth and remain focused on delivering long-term shareholder value through organic and transactional growth opportunities," concluded Millett.
Quarter 3 2019 fiscal guidance released by Steel Dynamics on 17 September 2019 is shown below
FORT WAYNE, Ind., Sept. 17, 2019 /PRNewswire/ -- Steel Dynamics, Inc. (NASDAQ/GS: STLD) today provided third quarter 2019 earnings guidance in the range of $0.66 to $0.70 per diluted share. Comparatively, the company's sequential second quarter 2019 earnings were $0.87 per diluted share and prior year third quarter earnings were $1.69 per diluted share, which included charges related to fair value purchase accounting adjustments of $0.04 per diluted share and a tax benefit of $0.04 per diluted share.
Third quarter 2019 earnings from the company's steel operations are expected to decrease in comparison to sequential second quarter results. The reduced earnings are primarily related to lower profitability from the company's sheet steel operations, as shipments and average steel pricing declined in the quarter, more than offsetting lower scrap costs. Underlying domestic steel demand remains principally intact for the primary steel consuming sectors, with particular strength in construction.
Third quarter 2019 profitability for the company's metals recycling platform is also expected to decrease when compared to sequential second quarter results, as a result of declining ferrous and nonferrous commodity prices coupled with steady shipments. Third quarter 2019 earnings from the company's steel fabrication business are expected to improve from sequential second quarter results, due to higher shipments and steady metal spread, as demand remains strong. The company continues to experience strong steel fabrication order backlogs and customers remain optimistic concerning non-residential construction projects.
Steel Dynamics (NASDAQ:STLD) stock price history
The image below, obtained from Google, shows the stock price history of Steel Dynamics (NASDAQ: STLD) for the last 5 years. And it's been a decent time for Steel Dynamics stockholders. 5 years ago Steel Dynamics was trading at around $24.40 and its currently trading at $30.52. So the stock has grown by 25% over the last 5 years. While its not bad the opportunity cost of holding the stock is pretty high when one looks as the strong growth over the last 5 years some of the othe stock we valued recently showed, with a large number of companies having grown by well over 100% over a 5 year period. Steel Dynamics is trading at a lot closer to its 52 week low than it is to its 52 week high, which to us is a clear indication that the short term sentiment and momentum of the stock is negative.
Recent coverage of Steel Dynamics
The extract below discusses Steel Dynamics at more detail, as obtained from Zacks.
Steel Dynamics, Inc. (STLD - Free Report) has issued downbeat earnings guidance for third-quarter 2019 as it expects lower profits in its steel operations in the quarter. The steel producer expects earnings for the quarter in the band of 66-70 cents per share. That is a decrease from 87 cents per share recorded in the previous quarter and $1.69 per share it earned a year ago. The company’s guidance also fell short of expectations. The Zacks Consensus Estimate for the third quarter is currently pegged at 73 cents per share.
The company expects earnings from its steel operations to be lower sequentially in the third quarter mainly due to reduced profitability from its sheet steel operations. The company attributed the decline in profitability to lower average steel prices and shipments that more than offset reduced scrap costs. The company noted that domestic steel demand remains intact for the primary steel consuming sectors.
Profitability for the company's metals recycling platform is projected to fall sequentially in the third quarter due to lower ferrous and nonferrous commodity prices along with steady shipments. Moreover, Steel Dynamics expects earnings from its steel fabrication business to improve on sequential-comparison basis on the back of higher shipments and steady metal spread, aided by strong demand. Steel Dynamics’ shares fell roughly 3% in after-hours trading yesterday. The stock has lost 34.4% over a year, underperforming its industry’s 28.7% decline.
Read the full article here
Steel Dynamics, Inc. (STLD - Free Report) has issued downbeat earnings guidance for third-quarter 2019 as it expects lower profits in its steel operations in the quarter. The steel producer expects earnings for the quarter in the band of 66-70 cents per share. That is a decrease from 87 cents per share recorded in the previous quarter and $1.69 per share it earned a year ago. The company’s guidance also fell short of expectations. The Zacks Consensus Estimate for the third quarter is currently pegged at 73 cents per share.
The company expects earnings from its steel operations to be lower sequentially in the third quarter mainly due to reduced profitability from its sheet steel operations. The company attributed the decline in profitability to lower average steel prices and shipments that more than offset reduced scrap costs. The company noted that domestic steel demand remains intact for the primary steel consuming sectors.
Profitability for the company's metals recycling platform is projected to fall sequentially in the third quarter due to lower ferrous and nonferrous commodity prices along with steady shipments. Moreover, Steel Dynamics expects earnings from its steel fabrication business to improve on sequential-comparison basis on the back of higher shipments and steady metal spread, aided by strong demand. Steel Dynamics’ shares fell roughly 3% in after-hours trading yesterday. The stock has lost 34.4% over a year, underperforming its industry’s 28.7% decline.
Read the full article here
Steel Dynamics (NASDAQ: STLD) latest stock valuation
So based on the earnings report of Steel Dynamics (NASDAQ:STLD) and the latest earnings guidance provided what do we value Steel Dynamics (STLD) stock at? Based on the earnings reported and the fiscal guidance provided by the group our valuation model provides a target (full value) price for Steel Dynamics at $35.90 a stock. We therefore believe the stock of Steel Dynamics is undervalued
We suggest long term fundamental and value investors look to enter the stock at least 10% below our target price of $35.9. Therefore the current price is a good entry point into the stock based on our valuation models. Our valuation takes into account a slow down in US economic activity as well as potential trade war negative effects that could affect Steel Dynamics in the medium term.
We suggest long term fundamental and value investors look to enter the stock at least 10% below our target price of $35.9. Therefore the current price is a good entry point into the stock based on our valuation models. Our valuation takes into account a slow down in US economic activity as well as potential trade war negative effects that could affect Steel Dynamics in the medium term.