Avoid Steel Dynamics This Year: Earnings Review

Oct.18.12 | About: Steel Dynamics, (STLD)

Steel Dynamics Inc. (NASDAQ:STLD), a steel producer and metals recycler, released its quarterly earnings yesterday. As expected for all steel producers this season, the company suffered from a huge drop in earnings as a result of a drop in shipments, average selling price per ton, and the general demand for steel. I am cautious about the steel industry this year and recommend investors not to put their money in this industry especially during such volatile times.

Earnings Review

The Indiana-based company reported its third quarter earnings showed a 70% YoY drop in profits. The company attributed this drop to the decline in both the sales volumes and pricing.

Steel Dynamics' net profit was 6 cents per share relative to 19 cents per share in 3Q2011. However, excluding one-time items, the profit comes out to be 15 cents, which is slightly ahead of analysts' consensus of 13 cents. Still, the company's revenue saw a 17% YoY drop to settle at $1.69 billion, way short of the expected revenue of $1.78 billion.

I am continuously skeptical about the steel industry as I don't see a turnaround in the industry coming soon. The steel prices have been hit lately as a result of depressed demand from the top consumer (and producer) of steel, China, along with the continuous oversupply and a flood of imports in the market. Unless manufacturing activity in China improves considerably and global economic activity paces up, a turnaround is not expected in the near-term.

According to a recent press release, the World Steel Association (WSA) expects that the steel consumption will grow at a rate of 2.1% this year, relative to last year's 6.2%. WSA has warned about a possible reduction in steel demand this year, following the severe Eurozone debt crisis and the persistently cool demand from China.

Chief Executive of STLD, Mark Millett said:

"We believe volumes could continue to be challenged in the fourth quarter, as fluctuations in immediate customer needs and hesitancy for customers to carry inventory persists."

The company was confident of the strength of its liquidity position as it has $1.4 billion of cash and available funding under the revolving credit facility, as at the end of the third quarter. The decrease of $144 million on a quarter-over-quarter basis is attributed to STLD's "refinancing initiative" which decreased its overall debt by $170 million.

The following table compares STLD to two of its competitors, U.S. Steel (NYSE:X) and AK Steel (NYSE:AKS).












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Source: FINVIZ

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.