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Summary

  • Steel Dynamics has acquired Severstal's Columbus unit, as the Russian steelmaker is withdrawing from the U.S. market.
  • Steel Dynamics will benefit from this acquisition, along with the resurgence in the auto and housing markets.
  • Steel Dynamics has robust fundamentals and its bottom line is expected to grow at a faster rate than the steel industry in the next five years.

Steel Dynamics (NASDAQ:STLD) has gained remarkably in the past one month. Shares of the steel player have gained 20% over the last one month, with the primary trigger being the withdrawal of Russian steelmaker Severstal from the U.S. market. Steel Dynamics has bought Severstal's Columbus unit for around $1.63 billion, as a result of which it will now have more clout in the U.S. steel market.

A smart move

Severstal's withdrawal from the U.S. comes at a time when political tensions between Russia and the U.S. are rising. Steel Dynamics will benefit as a result of this event because there will be one less supplier of steel in the U.S. market. Moreover, Steel Dynamics' enhanced capacity will allow it to profit from rising steel demand without being concerned regarding oversupply.

The acquisition adds a modern mini-mill to Steel Dynamics' portfolio. The acquisition of Columbus will enhance Steel Dynamics' steel operating platform, and raise its steel production capacity by a whopping 40%. As a result of the acquisition, Steel Dynamics' overall shipping capacity will increase to 11 million tons this year. In addition, the company will be able to attain a lower cost structure, which will enhance its operational efficiency.

After the acquisition, Steel Dynamics also plans to expand its market presence geographically into the Southern U.S., Mexico, and the Southeastern industrial markets.

Economic growth, auto, and housing will be tailwinds

The non-services sector of the U.S. economy is expected to grow at a healthy rate, better than the GDP. In addition, sales in the automotive market are continuing at a solid pace, exceeding analysts' expectations. The seasonally adjusted annual rate in the auto market currently stands at an impressive 16.5 million units, but this is expected to grow to 17.8 million units in the coming two years. As a result, Steel Dynamics will see an improvement in sales as increasing automotive production will lead to higher demand for steel.

Also, the need for fixed asset investment is increasing in the domestic energy segment. In addition, the manufacturing sector is getting better and this is leading to an increase in the usage of products that require steel. Apart from these economic developments, the construction market is still on a roll. The residential construction and non-residential markets increased 9% and 8%, respectively, year-over-year basis in May, and the trend is expected to continue going forward.

As reported by Reuters:

Higher mortgage rates and a surge in prices amid a dearth of properties available for sale have weighed on the housing market since the middle of 2013.

But as mortgage rates level off and house price appreciation slows, signs of life are emerging.

A report on Monday showed sales of previously owned homes, the largest segment of the housing market, recorded their largest increase in more than 3-1/2 years in May.

Further, there's continued strengthening of its order books across its fabrication and steel segments."

Clearly, broad market growth is expected in several end-markets, and this will propel Steel Dynamics' performance going forward.

Moreover, Steel Dynamics is working with Class I railroads for their process of qualification for premium rail. Steel Dynamics claims to be the only North American company to make 320 foot long rail, which gives it a solid competitive advantage in this market. In addition, Steel Dynamics' capability of manufacturing 1600 foot long standard or premium rails will allow it to attract more railroad customers. The longer rail will allow manufacturers to reduce installation cost, and reduce maintenance expenses, along with improving rail safety.

Valuation

Apart from solid growth prospects across several end markets, Steel Dynamics also has an impressive valuation. Its trailing P/E and forward P/E ratios are 26.51 and 11.49, respectively. This indicates Steel Dynamics' solid cost cutting efforts and end-market opportunities that are expected to deliver earnings growth. The PEG ratio of 0.74, below 1, represents undervaluation, and it is better than the industry's ratio of 0.89.

Finally, Steel Dynamics' impressive long-term growth prospects are indicated by an earnings growth CAGR of 24.03% for the next 5 years, way above the industry's feeble growth average of 4.25%. Hence, Steel Dynamics is a stock that investors should definitely consider for their portfolio, as it can deliver solid long-term gains.

Source: A Few Reasons Why Steel Dynamics' Remarkable Run Will Continue