Anticipating a stronger non-residential construction market in the longer term, Steel Dynamics Inc. (STLD), one of the leading steel producers in the U.S., is ramping up steel capacity at its New Millennium Building Systems subsidiary. The company has recently announced its decision to acquire some of Commercial Metals Corporation’s idled steel-joist manufacturing facilities located in Arkansas, Nevada and Mexico.
In addition, Steel Dynamics will also purchase production and material handling equipment from Commercial Metals. The total cost for the plant and assets purchased is estimated at $17 million. Steel Dynamics expects to spend about $20 to $25 million to upgrade each plant.
Earlier in February this year, Commercial Metals, a Texas-based steel producer had announced the divestiture of its steel joist business on weak demand conditions in the construction markets.
The transaction is scheduled to close by the end of October 2010. With the new capacity, Steel Dynamics would expand in the Southwest and Western regions and become the second largest provider of steel joists and decking. The company plans to resume operations at the plants shortly.
However, we are not too confident of this move in a scenario of weak end-markets and a slow economic recovery. Particularly since just a week before, Steel Dynamics had forecasted a bleak third quarter for 2010. The company stated that the sluggish Steel segment would negatively impact results in the upcoming quarter, with net earnings of a meager 5 to 10 cents per share.
Lower selling prices, particularly in the sheet and structural steel operations are expected to reduce net earnings substantially from last year’s net earnings of 30 cents. Steel Dynamics expects Metals recycling operations to be affected by the sequential reduction in ferrous metal spreads and reduced volumes. However, the company sees some improvement in sheet demand, which should drive full-year results.
Yet, projected third quarter results would be a significant decline of 54% from the second quarter 2010 earnings of 22 cents and would be well below the Zacks Consensus as well. Currently, Steel Dynamics is a short-term (1 to 3 months) Zacks #5 Rank (Strong Sell) and has a long-term (6+ months) Underperform recommendation.
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