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Steel Dynamics (STLD) Down 13.1% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Steel Dynamics (STLD - Free Report) . Shares have lost about 13.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Steel Dynamics due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Steel Dynamics' Q2 Earnings Lag, Sales Beat Estimates

Steel Dynamics logged net income of $194 million or 87 cents per share in second-quarter 2019, down from $362 million or $1.53 in the year-ago quarter. Also, earnings trailed the Zacks Consensus Estimate of 89 cents.

Net sales in the quarter fell around 10% year over year to $2,770.5 million. The figure beat the Zacks Consensus Estimate of $2,694.4 million.

The company faced a challenging steel pricing environment in the reported quarter. A softening scrap pricing environment and inventory destocking resulted in hesitancy in steel buying in the quarter.  

Segment Highlights

Net sales from steel operations declined around 9% year over year to $2,106.4 million in the quarter. Operating income tumbled roughly 45% year over year to $294.8 million. Operating income also fell 6% sequentially due to reduced shipments and product pricing within the company's long product steel operations. Average external sales price fell around 6% year over year to $879 per ton in the reported quarter.

The company's steel fabrication operations raked in sales of $241.4 million, up around 11% year over year. Operating income surged more than two-fold year over year to $30.7 million. Also, operating income jumped 49% sequentially driven by higher shipments and lower raw material steel input costs.

Net sales from metals recycling operations declined around 24% year over year to $323.1 million. Operating income fell around 59% year over year to roughly $10.6 million. The same also declined 45% sequentially due to lower nonferrous shipments and ferrous selling values.  

Financial Position

Steel Dynamics had cash and cash equivalents of around $972.6 million at the end of the quarter, up roughly 35% year over year. Long-term debt was $2,355.9 million, flat year over year.

The company generated cash flow from operations of $361 million in the quarter, up roughly 11% year over year.

The company also repurchased shares worth $93 million and paid $54 million in dividends during the second quarter.

Outlook

Steel Dynamics noted that underlying domestic steel demand fundamentals remains intact. It continues to witness positive activity across most of the steel consuming sectors including automotive, energy and industrial customers.

The company expects modest growth in steel consumption during the second half, backed by further steel import reductions and the end of steel inventory destocking. It expects recent trade actions to have a favorable impact in further lowering unfairly traded steel imports (including coated flat roll steel) into the United States.

The company is upbeat about the planned flat roll steel mill and the long-term value creation that is expected from value-added product and geographic diversification. It intends the new steel mill to have higher product capabilities compared with the EAF flat roll steel producers.

Steel Dynamics targeted regional markets that represent more than 27 million tons of relevant flat roll steel consumption. This includes the growing Mexican flat roll market. Per the company, the facility is expected to enjoy a considerable competitive advantage in those regions.

Going forward, the company will continue to strengthen financial position through robust cash flow generation along with the execution of its long-term strategy. The company believes that it is well positioned for growth. It is focused on boosting long-term shareholder value through transactional and organic growth opportunities.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Steel Dynamics has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Steel Dynamics has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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