Schnitzer Steel: Good For the Environment and Your Portfolio

Aug.25.06 | About: Schnitzer Steel (SCHN)

Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) is your one stop shop for all things recycling in metal. Founded in 1946, it is a vertically integrated company that engages in metal recycling, self-service used auto parts, and mini-mill steel manufacturing businesses. While scrap pricing has recently gone up in this country, hurting margins, overseas pricing has been favorable for Schnitzer.

They also have new “mega-shredders” that can process over 2500 tons of metal a day, a vast improvement in volume over their current 1,500 tons of metal per day shredders. Last quarter, Schnitzer saw a 77% improvement over last year same quarter in operating income from the recycling segment. The auto parts business has also done well for them recently, and their steel manufacturing segment posted record operating earnings for the 3rd straight quarter, thanks to the on-going demand for steel in the West Coast.

The SEC is investigating the company for faulty payment practices in Asia, and Schnitzer has recently set aside $4 million reserve as an estimate for the settlement. When it is all said and done, this might make the stock drop and be an even better buying opportunity.

Besides having a solid company, I like that Schnitzer is engaged in a process that is good for the environment. According to studies, steel recycling compared to new manufacturing saves enough electrical energy annually to power about one-fifth of all U.S. households (18 million homes) for a year.

Type of stock: A cyclical stock in the steel and iron industry, Schnitzer has rock solid financials and is poised for growth, particularly into foreign markets.

Price target: Now trading at $33.56, Schnitzer is fairly cheap but you may be able to get this at deeper discount if the stock takes a hit from the impending SEC settlement. They are on markfor continuing their solid performance, and their business model is a good one. This is one you could see ride up to the mid $40s in the coming year, but you may want to hang onto it for the longer term, too.

SCHN 1-yr chart: