Shares of Steel Dynamics Inc. (STLD), one of the leading producers of carbon steel plunged 1.48% post second quarter 2010 results, which were below the Zacks Consensus expectations. The cautious near term guidance added to the negative market sentiments.
Steel Dynamics earned $49 million or 22 cents for the second quarter of 2010 missing the Zacks Consensus Estimate by 2 cents while it lagged first quarter income by 7 cents. However, second-quarter results reversed losses of $16 million or 8 cents recorded in the year-ago quarter.
Quarterly revenues of $1.63 billion, although more than doubled from the year-ago period on higher steel shipments, fell behind the Zacks Consensus Estimate of $1.64 billion. Operating income of about $117 million formed 7% of total sales.
Segment Review
Steel Operations: Higher volumes and prices drove segment revenues to $1 billion, almost double the year-ago amount. Steel shipments improved 39% to 1.3 million tons while average steel prices leaped 63% year-over-year to $829 per ton. The average cost of ferrous scrap per net ton increased $49 compared to the first quarter. Higher revenues transformed into higher operating income. Operating income of $131 million in the second quarter was a significant improvement from $33 million in the corresponding quarter of the previous year.
Metals Recycling and Ferrous Resources: Total revenues of $848 million was significantly up from last year’s $309 million. Higher revenues were driven by increased non-ferrous shipments in the ferrous and non-ferrous metals business. Non-ferrous shipments improved 39% to 237 million pounds. The segment recorded operating income of $6.9 billion in contrast to operating losses of $6.6 billion in the second quarter of 2009. Steel Dynamics is ramping up capacities at its Mesabi Nugget operations, which produces iron nuggets for mini-mill steelmaking. The company owns 81% of the project with the rest being held by Kobe Steel Ltd.
Steel Fabrication Operations: The segment comprises the New Millennium Building Systems’ fabricating plants that produce joists, trusses, and steel decking, used in the construction of non-residential buildings. Second quarter revenues of $42 million were up 14% year over year. Shipments improved 18% year over year to 42,000 tons. The segment recorded operating loss of $5 million for the quarter compared with operating income of $16,000 in the second quarter of 2009, however loses improved sequentially.
Financial Review
Steel Dynamics’ debt-to-capital ratio has remained above 50% in the last three quarters. As of June 30, 2010, Steel Dynamics’ debt totaled $2.4 billion up 17% from $2.1 billion as of Dec 31, 2009. Cash and cash equivalent amounted to $191 million as of June 30, 2010.
Guidance
Steel Dynamics provided a bleak overall demand outlook although it expects end markets to stabilize. The company experiences uncertain demand for its flat-rolled steel products while demand for structural steel is likely to remain weak. Steel Dynamics operates its structural steel mills at less than 40% of its total capacity. However, the company predicts high demand for its engineered steel bars and long steel products, going forward.
Zacks Recommendation
The Zacks Consensus Estimate is pegged at 30 cents and $1.14 per share for the third quarter and full year 2010 with a downside potential of 16.67% and an upside potential of 1.75%, respectively. Steel Dynamics has missed the Zacks Consensus in two of the trailing four quarters, with an average surprise of 0.60%.
Currently, Steel Dynamics has a short-term (1 to 3 months) Zacks #5 Rank (Strong Sell) and a long-term (6 months and higher) Underperform recommendation.
Read the full analyst report on “STLD”
Zacks Investment Research
