Update: Olympic Steel Earnings

Aug.20.14 | About: Olympic Steel, (ZEUS)

Summary

The company beat 2Q consensus on the top line, but missed the bottom line.

We still remain bearish on the company, noting the valuation is even more expensive now despite the pullback in shares.

We felt the miss in earnings was anticipated given the company’s over reliance on steel prices and non-flexibility in its cost structure.

Olympic Steel (NASDAQ:ZEUS) posted 2Q earnings of $0.32 a share (missing $0.42 consensus), but revenues were $386 million (topping $368 million consensus). Sales were up 16.7% y/y for 2Q, and representing record sales in a quarter for the company. Net income was up 38% y/y. But shares are flat over the last month.

There's just not much to get excited about. Despite the strong quarter (on a y/y basis), full-year 2014 EPS consensus has still fallen from $1.30 a month ago to $1.14 currently.

Shares are down 22% since we initially covered the company back in October. The stock is still 11% higher than our $21.50 price target. Its EV/EBITDA multiple has expanded to 12x, well above our justified 7x multiple. As we noted in October:

As mentioned, debt at Olympic is troublesome, and the company hasn't had any meaningful results with controlling costs. It has implemented headcount reductions that should save $4 million in operating costs annually. Which, in reality, is small beans compared to the $300 million plus in costs the company has every quarter.

Its debt is still 94% of its market cap and its profit margin is a mere 0.47%. Its net debt is 92% of its market cap, which is up from the 66% when we covered ZEUS back in October.

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