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Bull of the Day: Steel Dynamics (STLD)

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Steel Dynamics (STLD - Free Report) is a Zacks Rank #1 (Strong Buy) that is a leading American steel producer and metal recycler. The company has a diversified range of products and the stock has been grinding higher on improvements across the industry in pricing.

However, a recent pullback after some earnings guidance from a handful of steel companies caused the sector to sell off. Investors that missed the big rally should be looking to buy these pullbacks as a longer bull trend should continue in 2021.

About the Company

Steel Dynamics was founded in 1993, is headquartered in Fort Wayne, IN and has over 8,300 full time employees. The company operates in three segments: Steel Operations, Metals Recycling, and Steel Fabrication Operations. The Steel Operations segment, which produces steel form ferrous scrap and scrap substitutes, represents a majority of the business at 76% of revenues.

Rising Steel Prices to Stabilize

Outside of energy, most steel-consuming sectors have come back to pre-pandemic levels. Auto production and residential construction has come back strong.

While demand is strong, the supply side has been tight as well, which has caused steel prices to shoot higher. Steelmaking capacity has been offline for various reasons, but mainly due to pandemic. Prices should stabilize as post-pandemic demand increases and supply comes back online.

Q4 Guidance from STLD and others

Last week we saw mixed guidance from a handful of steel names including U.S. Steel, Nucor and Steel Dynamics.

U.S. Steel issued Q4 guidance below estimates, while Nucor guided slightly above consensus.

Steel Dynamics sees Q4 at $0.80-$0.84 v the $0.83 expected, so about right in line. However, the company said that earnings from the company’s steel operations are expected to be meaningful higher than sequential third quarter results. The company sees strong demand and low inventories supporting higher steel selling values.


Earnings and Estimates

The company has beat on EPS four quarters in a row and will officially report Q4 earnings in late January. Over the last 90 days, estimates for the current quarter have gone from $0.49 to $0.78, or 36% higher. Estimates look to be trending higher for 2021, going from $2.09 to $2.77 over the same time frame, a jump of 32%.

The Tesla Rumors

Earlier this month, Electrek reported that Steel Dynamics will supply steel for its Tesla’s Cybertruck from its Texas factory. The rumor has yet to be confirmed, but if it eventually is, this would be a major lift for shares of STLD. Additionally, the steel sector as a whole would benefit as it shows commitment to using steel to build EVs.

The Technical Take

On the technical front, the stock failed at the 21-day moving average and sellers came in. The next level will be the 50-day MA at $35, which aligns with the 61.8% Fibonacci retracement drawn from October lows to recent highs at $41.55.

All-time highs were hit back in 2018 at $52.10. If support can hold at $35, we should see a rally back to recent highs. If the strong fundamentals remain in the steel industry, that all-time high level should be surpassed in 2021.

Investors looking for a bigger pullback would have to hope for a large market sell off, as the 200-day is all the way down at $28.50.

 In Summary

Commodities have had a nice run and they are likely due for some selling. However, the overall trend is still very bullish and if investors see technical support holding, they should jump in quickly.

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