Steel Dynamics the steel minimill operator sent their investors into a whirlwind of emotions on Tuesday after a rollercoaster of news from the company contradicted itself at every turn. Initially Steel Dynamics brought to the attention of their investors a warning that their second quarter earnings were not on track, which caused the share price of the operator to sink in after-hours trading. However following this the share price of the company did a complete 180 and gained over 10% in midday trading, and finishing up the session with a 9% gain. But what caused this wave of buying and selling?
With the initial earnings warning, the Indiana based steel operator said that after earnings were $0.91 USD per diluted share in the first quarter of this financial year, which meant that its second quarter earnings were almost certainly going to fall, and the estimates by the company were set between $0.86 – $0.90 USD per share. With this news investors were shocked, as Wall Street had led investors to believe the opposite. Moving into the earnings warnings, estimates quoted that the majority of analysts that were following the company thought that while earnings would expectedly be down year after year, they would at least be showing an incline sequentially to a respectable $0.99 per share. Instead of this positive news Steel Dynamics is saying that their business is facing deterioration at an exceedingly faster rate than expected. This backed by the fact there is lower profitability in their long term steel product operations, and the hesitance of consumers looking to purchase steel.
For investors and institutions who follow the company this is rather disappointing, however amongst the disappointment the saving grace is that the company’s share price may have reached a level that is cheap enough to overcome buyers hesitant stance on owning the stock. Looking at the numbers Steel Dynamics stock is currently trading at a cost of only 5.4 times its trailing earnings, and those earnings unfortunately are deteriorating faster than analysts had estimated.
However looking at other estimates, the company’s forward P/E ratio is sitting well at only 8.6 which is not a cause for concern, as this number represents a relatively cheap stock in the cyclical industry. In an industry like this prices are always going to go up eventually, and management of companies like this are paying a very healthy dividend of 3.8% which calms the tensions enough for investors to hold on to their holdings. With the share price of Steel Dynamics being as ‘cheap’ as it is, it is not hard to see why investors, even faced with this level of volatility are still trying to get hold of a piece of this company.
Darryl Johnson – IEC International