Steel Dynamics (STLD) has had a rough couple of weeks as the shares are trading 23% lower since January 8th. On Wednesday. the nation’s fifth largest producer of carbon steel products reported net income of $26.7 million which equates to 12 cents per share and missed analysts’ estimates by five cents. With that said, the company did grow production by 31% and topped analysts’ view of revenue which totaled $1.18 billion. The company also lowered production costs 18%, but this was trumped by declines in steel prices.
For the year, revenue fell by 51% to $4 billion, and earnings per share showed a four cent loss. However, analysts have projected a much stronger fiscal 2010 as they expect to see $1.37 per share in earnings, and the median price target is $22.75, a full 50% higher than the current price. Steel Dynamics was able to greatly expand their tonnage produced in the last quarter while lowering production costs, but clearly these analysts’ projections are forecasting steel prices to rise as the global recovery continues.
Steel stocks have benefited greatly from hopes of recovery, particularly relating to resource hungry China. However, there are growing concerns that both the Chinese and U.S. economies may not yet be out of the woods. China’s GDP in the last quarter topped double digits which leads many to believe that their central bank will restrict the flow of cheap capital. Furthermore, an executive for a Chinese steel producer recently said that domestic capacity is “reasonable” to meet demands. In the United States, demand for steel used in building projects remains very weak, and continued trouble in the labor market dampens the perception of robust economic recovery. For a stock like Steel Dynamics, which at one time had quadrupled from the lows, the renewed economic concerns are troubling investors.
As for the Ockham valuation, we continue to have an Overvalued stance coming into this week. This stock had advanced well ahead of actual fundamental improvements, which is a key reason for the sell off today. Generally, we look to find stocks that have seen their revenue and earnings grow but that improvement has yet to be reflected in the price. With Steal Dynamics it is the inverse situation, so we believe there is still some downside risk as the price was being supported largely by sentiment.
