Steel Dynamics (STLD) is a diversified carbon-steel producer, metal recycler and one of the largest American steel companies. The company operates five steel mini mills in North America with annual capacity of 6.3 million tons.
STLD recently reported 2Q13 EPS of $0.13, roughly in-line with consensus estimates of $0.14 and at the high end of the company's guidance of $0.10 to $0.14. The stronger than expected results from the Recycling segment were offset by weaker than expected results from the Steel Operations segment.
Steel operations' EBIT took a hit and declined to $88 million from $122 million in the previous quarter. While shipments of 1.523 million tons were up 53,000 tons QoQ, average selling price declined by $8 per ton. Costs in the second quarter also rose by $17 per ton. Scheduled outages in the Flat-Rolled and Engineered Bar operations contributed to decline in quarterly profits. Mill production utilization of 83% also came in 6 percentage points lower than the first quarter.
The Fabrication segment shipments of 86,000 tons were up 9,000 tons QoQ and 8,000 tons YoY. The segment reported operating profit of $2.3 million, up $0.8 million QoQ, as pricing improved to $1,220 per ton from $1,214 per ton in 1Q.
Recycling and Resources segment EBIT of negative $1.8 million posted an improvement of $2.5 million from the previous quarter. In 1Q13 Recycling segment reported negative EBIT of $4.3 million. EBIT at OmniSource also declined during the quarter to $15.8 million. The company's Minnesota operations posted a net income loss of $9 million, representing an improvement from 1Q's loss of $14 million.
Mesabi nugget operations improved sequentially and posted a 2Q loss of $9 million. The company expects 3Q results to also improve Q/Q.
Mesabi Nugget and Other Projects Update
Mesabi is expected to hit and maintain an annualized production rate of 360,000 tons (30,000 ton per month) by year-end and next year performance is expected to improve further to an annualized rate of 400,000 to 450,000 tons (33,000 to 35,000 ton per month). As month production surpasses 30,000 tons, Mesabi should be breaking even and generating profits by year-end.
STLD is also on track to complete the organic growth projects scheduled to start at the end of this year, including the engineered special-bar-quality ("SBQ") capacity expansion and the premium rail product addition. The SBQ project will add 325,000 tons of small diameter bar capacity, taking the facility's total capacity to 950,000 tons. In addition, the Structural and Rail Division could supply 200k tons of semi-finished blooms, boosting utilization rates.
STLD continues to see demand for high-quality steel products and remains focused on executing its organic growth projects, which are expected to kick-off at the end of 2013, such as SBQ capacity expansion, premium rail, etc. The automotive market remains resilient and strong and manufactured goods is strengthening as housing starts indicate potential for a sustainable recovery in residential construction. The company; however, remains "cautiously optimistic about the nonresidential construction market in 2013".
Conclusion and Investment Thesis
We have a buy rating on STLD. We believe STLD is positioned to benefit from being one of the most vertically integrated steel producers in the U.S. The company continues to perform well in a tough environment and has directed cash flows to debt repayment and investments in its business which should gradually increase its earnings power through higher mix, improved utilization rates, and lower raw material costs as they come on-line.
STLD also remains on budget and on time for its major growth projects, including SBQ expansion that is to come online in 4Q13 and its addition of head-hardening rail capabilities, scheduled to begin production by year-end. Both these initiatives would increase its higher margin product mix and provide earnings upside.
Finally with improvements in the construction-related demand, increased SBQ (special-bar-quality) volumes, and a swing to positive profitability at the Mesabi Nugget operations, the company is well positioned to deliver earnings growth in the second half of 2013 and next year. Any rebound in the non-residential construction would further boost earnings, given the company's considerable under-utilization of assets in this area.