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Schnitzer Steel is riding the price surge on ferrous metals to record earnings. The company has surprised on estimates 2 out of the last 4 quarters. Schnitzer has a forward P/E of only 10.80 even as the stock has soared in 2008.

Company Description

Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) manufactures and exports recycled ferrous metal products in the United States. Founded in 1906, the company has facilities in 11 states, including six export facilities on both the East and West Coasts and in Hawaii.

Schnitzer, a Zacks #1 Rank (Strong Buy), also operates an auto parts segment and steel manufacturing businesses.

The auto parts segment sells used auto parts at 35 self-service facilities and 18 full-service facilities in 15 states and western Canada.

The steel segment produces 750,000 tons of finished steel products, including rebar, wire rod and other specialty products.

Schnitzer Beats Wall Street Estimates for the Third Quarter By 8.08%

On July 1, Schnitzer Steel reported third quarter earnings and beat Wall Street estimates by 8.08%, or 16 cents per share. Net income rose 41% to a record $62 million, or $2.14 per share, from $44 million, or $1.47 per share in the third quarter 2007. Analysts expected $1.98 per share.

Revenues jumped 37% to a quarterly record of $972 million from $709 million in the year-ago period. Revenues for the first three quarters of 2008 increased 28% to $2.328 million from $1.824 million in the first three quarters of 2007. The growth was seen in all three of the company's segments, as each posted record revenues and operating income.

In the metals recycling segment, the company said that global demand for recycled metals remained robust and was being driven by economic growth in developing countries. Revenues were up 38% in the metals recycling segment due to record ferrous scrap prices and higher nonferrous sales volumes. Ferrous prices rose 57% year-over-year and nonferrous sales volumes increased 19%.

In the steel segment, SCHN reported tight domestic supply conditions due to low level of imports. Revenues rose 49% compared to a year ago due a 25% increase in net prices and a 20% increase in sales volumes.

The auto parts segment had its sixth consecutive quarter of year-over-year operating income growth as the company saw higher prices for core and scrap.

Schnitzer is Bullish about the Fourth Quarter

The company is extremely bullish about the metals recycling segment, stating that the export markets for ferrous scrap continue to strengthen. Average selling prices on ferrous metals are expected to increase another $100 to $125/ton over the third quarter. SCHN sees nonferrous prices declining slightly. The company expects margins to continue to rise.

SCHN also expects higher prices for core and scrap to buoy the auto parts segment. The company forecast that its pricing power in the steel manufacturing segment will continue despite soft domestic demand and rising raw material costs.

Consensus Estimates Rise for the Fourth Quarter

In response to the bullish third quarter report from the company, brokerage analysts have been raising estimates for the fourth quarter and the full year. For the fourth quarter, estimates surged 30% in the prior month to $2.83 from $2.18 per share.

For the full year, estimates are up 11.5% to $7.03 from $6.28 per share in the last 30 days.

Value Fundamentals

Schnitzer Steel has a forward P/E of 10.80. Its price-to-book (P/B) is 2.87. Schnitzer has an outstanding average five year return on equity [ROE] of 22.28%. The company also pays a small dividend, with a current yield of 0.10%.

Source: Schnitzer Steel Beats Estimates, Bullish About Q4