Steel Dynamics (STLD) is a vertically integrated steel producer, ferrous resources operator, metals recycler and steel fabricator. Its steel operations consist of five mini-mills which serve primarily the automotive, construction, transportation, agriculture and industrial machinery markets. This division comprises about 60 percent of its operations. The company's recycling and raw materials division, which accounts for about a third of its operations, provides ferrous and non-ferrous raw materials to mills and foundries. The balance of Steel Dynamics' operations consists of its steel fabrication unit, which supplies trusses, girders, joists and decking for non-residential construction.
Steel Dynamics' revenues are in line to beat those of 2012, but only slightly. Expected annual revenue is still far off its 2011 highs. Cost of revenue and SG&A expenses are consistent with revenues, but gross and operating margins are lower over the previous year. Net margins are slightly better this year, but, like revenues, still well off 2011 highs.
The company's cash position has been stable for three years, as has its inventory turnover. Receivables, on the other hand, relative to revenue have increased fifteen percent this year on an annualized basis. The company may be allowing customers to extend their credit in order to recognize greater top-line sales. Steel Dynamics' current ratio has lost a third since the end of last year. On the positive side, its long-term debt to asset ratio continues to improve steadily since 2010.
Steel Dynamics' free cash flow has declined precipitously since last year, over 55 percent, and is a mere 30 percent of what it was in the 2011 banner year.
The problem for Steel Dynamics is the seemingly chronic domestic oversupply of steel. Prices have dropped more than raw materials. The prices of scrap iron and other input have fallen less than mill products since brokers in places like India and China consistently pay more for scrap than those in the U.S. This has buoyed domestic scrap prices relative to mill products. Both the company's steel operations and recycling and raw materials division have been restrained on this account. In fact, the recycling and raw materials division deepened its operating losses last quarter by $1.4 million over the same period last year. One upside to the domestic steel glut has been that Steel Dynamics' fabrication operations have flourished due to lower material costs. This division, however, is responsible for less than ten percent of the company's revenue.
Overall, Wall Street analysts are giddy over Steel Dynamics. Eighteen analysts on average estimate a 77 percent increase in 2014 earnings. Growth estimates for the company are a staggering 27.37 percent per annum for five years. In an industry where similar growth estimates are 4.67 percent, it is hard to imagine how Steel Dynamics could sustain that level of growth with significantly declining free cash flow. If these estimates are already priced in, it is the opinion of this writer that Steel Dynamics is overvalued.
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. (More...)
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