Steel Dynamics (STLD) looks like a good long-term bet – here’s why

Steel plays a key role in shaping up the economy because it is a material that is extensively used in some of the top industries. During the pandemic, the performance of leading metal manufacturers like Steel Dynamics, Inc. (NASDAQ: STLD) has been relatively encouraging.

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Steel Dynamics ended the first half of fiscal 2020 on an optimistic note with demand conditions improving in the final weeks of the second quarter, especially in the construction sector. The demand for steel and ferrous scrap was hit by the temporary closure of steel-consuming businesses and production cuts by automotive manufacturers. Experts believe the COVID-related uncertainty is likely to linger in the key markets, which can affect orders during the remainder of the year.

On the positive side, more and more steel-consuming companies are resuming operations, giving hopes that the market would recover earlier than expected.

Mixed Sentiment

Currently, investor sentiment is not very bullish, with experts predicting a dip in market value in the near term. So, it is advisable to assess the risk factors before investing in the stock, which bears a moderate buy rating. However, the Fort Wayne, Indiana-based company’s impressive track record of value creation and strong fundamentals make the stock a safe bet for the long-term. Steel Dynamics has raised its cash dividend consistently in the past five years and returned about $1.2 billion to shareholders during that period, which represented about 65% of net income.  

Interestingly, Steel Dynamics’ mills operated at a capacity that is much higher than the domestic industry average during the crisis period, so far.

“As states continue to determine their reopening guidelines and many steel-consuming businesses have resumed operations, we anticipate steel demand will materially improve from the second quarter trough. The automotive sector and its related supply chain have restarted production and we have started to see some resulting increase in steel demand.”

Mark Millett, chief executive officer of Steel Dynamics

Capital Spending

Meanwhile, the changed scenario has cast uncertainty over the development of the company’s flat-roll steel mill in Texas, an upcoming project that is expected to reduce its dependence on overseas suppliers. The $2-billion project would put pressure on liquidity though Steel Dynamics’ cash position remained healthy so far this year. For the second half alone, investments worth $800-$850 million are in the pipeline.

Earlier this month, the company acquired Mexico-based scrap metal recycling company Zimmer in an all-cash deal as part of its material procurement plan. Its growth strategy continues to be based on acquisitions and partnerships.

Crisis Weighs on Q2

In the second quarter, the company’s financial performance was better than the market’s projection. Earnings per share decreased to $0.47 as sales dropped by a quarter to about $2 billion, but both numbers came in above the consensus forecast. Given the intense economic slowdown, the 12% drop in steel shipments is considered relatively modest.

“Second quarter was a trough for volumes for sure. Particularly on the sheet side of our business. And I think there is an inflection point in pricing in the next few weeks. So I think that that’s a positive direction on momentum for pricing,” said Mark Millett, chief executive officer of Steel Dynamics, while speaking to analysts after the quarterly report.

Peer Performance

The story was not much different for rival steelmaker Nucor Corporation (NYSE: NUE), which last month reported lower earnings and revenues that topped the Street view. Combined, data released by the two companies provide a mixed outlook for the steel industry, indicating a slow and steady recovery led by the automotive and construction sectors. However, the cyclical nature of the industry makes it difficult to forecast, especially in a crisis-stricken market.

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Read management/analysts’ comments on Steel Dynamics’ Q2 2020 results

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Steel Dynamic’s market value bounced back from the multi-year lows seen in mid-March and remained on the growth path since then. Staying below the long-term average, the stock closed the last session at $30.68, which is up 11% from last year.