Steel Dynamics Guides Higher

Steel Dynamics Inc. (STLD - Snapshot Report), the sixth-largest steel maker in the U.S., recently boosted its third-quarter earnings forecast to a range of 20 cents to 25 cents per share, up slightly from its July view of 10 cents to 20 cents. The Zacks Consensus Estimate is pegged at 15 cents. The higher guidance was primarily driven by better-than-expected performance in the flat rolled steel and metals recycling divisions. The company’s flat rolled order is strong with bookings through October.

Steel Dynamics became the largest producer of ferrous scrap after acquiring Indiana-based OmniSource Corp. in 2007. The company believes that its scrap business will be profitable in full year, reversing losses of about $9 million in the first half of 2009. Significant improvements in processing volume and better margins due to higher facility utilization, better cost control and favorable pricing should help margins in the business.

The company is building a $235-million iron-making facility in Minnesota (Mesabi Nugget) in partnership with Kobe Steel of Japan. The project will produce a fully metalized iron-nugget product suitable for use as an alternative iron or scrap substitute. Steel Dynamics expects bulk of the iron output from this planned nugget plant to be consumed in its mini-mills.

The company did not provide any guidance for the fourth quarter, citing uncertainty in the market and continued weakness in non-residential construction industry. However, we believe Steel Dynamics will benefit from its relatively higher mix of flat steel.

The company has expanded its flat steel operation at the Butler plant in Indiana to 3 million tons and runs it at full capacity. Despite a weak long bars and beams market and extremely low utilization rate, Steel Dynamics was able to manage profit on the back of strong prices at this division.

Although the market for beams could remain particularly challenging for some time, we believe that the company is well positioned to take advantage when the economy recovers. Additionally, the Mesabi Nugget project should further reduce its already low cost structure. We maintain our Outperform recommendation on the stock.