Schnitzer Steel Industries: No Triggers For The Short Term

Apr. 8.12 | About: Schnitzer Steel (SCHN)

Shares of Schnitzer Steel (SCHN) ended the trading week on a strong note after reporting its second quarter results. Shares ended the day 3.7% higher.

Second Quarter Results

Net income for the second quarter of fiscal 2012 fell from $31 million last year to $9.6 million this year. Earnings per share of $0.35 beat analyst expectations of $0.33 per share after the company lowered its outlook about a month ago. Revenues increased 23% to $887 million. Shares reacted positively to the earnings beat, despite the fact that profits fell 70% on the year. The decision of the Board of Directors to raise the quarterly dividend to $0.1875 has boosted confidence towards the future as well.

Valuation

Schnitzer held $50 million in cash according to its latest quarterly filing and about $400 million in debt. After Thursday's rise the market value has approached $1.1 billion which represents a 0.3 times revenue multiple and 9 times 2011 earnings. This compares to 0.7 times revenue and 17 times earnings for major competitor Nucor (NUE)

For the first half of 2012 the company has reported net earnings of $16 million on revenue of $1.7 billion. While the company is on track to report similar revenue for the entire year of 2012, net income is likely to fall with mean earnings per share estimate of $2.38 for the fiscal year of 2012, roughly $60-$65 million in net income.

Investment Thesis

Shares have roughly fallen a third from levels of $65 early in 2011 to levels around $40 at the moment. This is largely due to the fact that net margins which came in at 3.4% in 2011 are likely to fall to levels around 2% for 2012.

As is the case for any steel company, Schnitzer is extremely exposed to the general economic circumstances. The company is inherently tied to the general business circumstances in an industry were (over)capacity dictates profitability and consequently the share price developments.

There are few realistic triggers why shares should significantly outperform in the near future, despite the latest earnings report which beat on "lowered" expectations.

I have no strong opinion for the short term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.