From its beginning in 1975, Chaparral Steel Company (CHAP) has been a technologically advanced steel manufacturer using 100% recycled steel primarily from shredded automobiles. The Midlothian, Texas based firm engages in the production of steel bar and structural steel products. Focusing mainly on North America, the company operates two mini-mills in Texas and Virginia that have an annual production capacity of about 2.8 million tons of steel. Originally spun-off from Texas Industries, Inc. (NYSE:TXI) in July 2005, the company has been operating since 1973.
From its modest beginnings of a mill in Texas with an annual production capacity of 0.25 million tons, CHAP has developed a reputation for expansion in its field and has grown to a market capitalization of over $2.0 billion. Now, it is the second largest producer of structural steel products in North America, operating mini-mills instead of integrated mills. CHAP is able to conserve energy and capital by melting recycled steel scrap in electric arc furnaces. The company is also capitalizing on the recent growth in demand for structural steel because of the weakness of the U.S. dollar and increases in global pricing outpacing the increase in raw material costs.
In the past year revenue growth has been a healthy 32.21% and a one year net income growth a far more impressive 179.13%. These figures are coupled with steady profitability, including a return on equity [ROE] of 27.03% compared to the steel and iron industry average of 24.09%, an operating margin of 20.69% compared to the industry average of 15.61% for the last year. Combined, the numbers indicate potential for further stock price increases.
In terms of valuation, the price to earnings [P/E] ratio of 11.61 is about on par with the industry average of 11.13. Recently, the company has been confident in its outlook, initiating a stock repurchase program and a quarterly cash dividend. We recognize why. When factoring in growth, CHAP posts a minuscule price to earnings to growth [PEG] ratio of 0.07 compared to an industry average of 1.60 providing further evidence that the stock may be undervalued. Given these compelling data points, our algorithms included this strong spin off in theClear Spin-Off Index.
CHAP 1-yr chart
Note: This post was originally researched by our junior analyst Arthur Getman.