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Will Outages Hurt Steel Dynamics' (STLD) Earnings in Q4?

Anindya Barman

Steel Dynamics, Inc. STLD is set to release fourth-quarter 2018 results before the opening bell on Jan 22.

The steel maker saw its profits surge in third-quarter 2018, driven by strong domestic steel demand, higher steel product pricing and record steel shipments. The company logged profit of $398 million or $1.69 per share in the quarter, up from $153 million or 64 cents a year ago. Earnings per share topped the Zacks Consensus Estimate of $1.65.

Net sales in the quarter shot up around 32% year over year to $3,223.5 million, also exceeding the Zacks Consensus Estimate of $3,165 million.

Steel Dynamics has an impressive earnings surprise history. It has outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering a positive average earnings surprise of 5.2%.

Steel Dynamics’ shares have lost 27.6% over a year, outperforming its industry’s 31.1% decline.


 

Can the company surprise investors again or is it heading for a possible pullback? Let’s see how things are shaping up for this announcement.

Factors to Watch For

Steel Dynamics, in December 2018, provided downbeat earnings guidance for the fourth quarter as it expects costs associated with significant maintenance outages to dent its profits for the quarter.

The company expects earnings for the fourth quarter in the band of $1.11 to $1.15 per share. That is a decrease from $1.69 per share recorded in the previous quarter and $1.28 per share it earned a year ago.

The company expects earnings for the fourth quarter to be hit by (a roughly $14 million impact) planned outage at its liquid pig iron production facility to complete a major maintenance. It also sees significant planned maintenance outages at its two flat roll steel mills to hurt profitability for the quarter. The company envisions higher-than-normal maintenance and associated costs of roughly $20 million. Per Steel Dynamics, the outages also lowered fourth-quarter shipments across these facilities by an estimated 70,000-80,000 tons.

Excluding one-time items (including maintenance outage costs), adjusted earnings for the quarter is projected in the range of $1.25 to $1.29 a share.

The company expects profitability from its steel operations to be lower sequentially in the fourth quarter due to reduced earnings from its flat roll operations. Its flat roll operations saw increased maintenance costs and reduced shipments resulting from significant outages across Butler and Columbus locations.

Earnings from the company's metals recycling platform are projected to rise sequentially in the fourth quarter on the back of improved recycled non-ferrous metal spread and shipments. The company also sees an improvement in recycled ferrous metal margin.

Steel Dynamics also expects profits from its steel fabrication business to improve on sequential-comparison basis. Average sales prices are forecast to rise sequentially and more than offset seasonally reduced shipments. The company is witnessing strong steel fabrication order activity and backlogs.

For full-year 2018, Steel Dynamics expects record annual earnings, significantly higher than its earlier record logged in 2017. The company anticipates steel consumption and market dynamics to remain strong in 2019 factoring in strong steel demand fundamentals and customer optimism. The company is also optimistic about delivering strong free cash flows.

Steel Dynamics’ net consolidated sales for the fourth quarter are projected to increase 25.7% year over year, as the Zacks Consensus Estimate for net consolidated sales is currently pegged at $2,937 million.

For the fourth quarter, net sales in the steel operations division are projected to increase roughly 32.7% year over year as the Zacks Consensus Estimate for the same is currently stands at $2,216 million.

Moreover, net sales in the steel fabrication operations are projected to increase roughly 10.4% year over year as the Zacks Consensus Estimate for the same is currently pegged at $244 million.

Net sales in the metals recycling operations is likely to decline roughly 26.3% year over year, as the Zacks Consensus Estimate is currently pegged at $261 million.

Meanwhile, Steel Dynamics is progressing well with the integration of the recent Heartland acquisition and is on track to attain its expected annual run-rate of between 800,000 tons and 900,000 tons of cold roll, pickled & oiled, and galvanized flat roll steel by mid-2019.

The company is also currently executing a number of projects that should add to capacity. It is investing $1.7-$1.8 billion to build a new electric-arc-furnace (“EAF”) flat roll steel mill in the United States that is expected to have a production capacity of roughly 3 million tons annually. It will have the capability to make the latest generation of advanced high strength steel products.  

Earnings Whispers

Our proven model does not show that Steel Dynamics is likely to beat estimates this quarter. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Earnings ESP: Earnings ESP for Steel Dynamics is -2.02%. This is because the Most Accurate Estimate is currently pegged at $1.23 while the Zacks Consensus Estimate stands at $1.25. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Steel Dynamics currently carries a Zacks Rank #3, which when combined with a negative ESP, makes surprise prediction difficult.  

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Steel Dynamics, Inc. Price and Consensus

 

Steel Dynamics, Inc. Price and Consensus | Steel Dynamics, Inc. Quote

Stocks to Consider

Here are some companies in the basic materials space you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

New Gold Inc. NGD has an Earnings ESP of +166.67% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Allegheny Technologies Incorporated ATI has an Earnings ESP of +3.18% and carries a Zacks Rank #3.
 
LyondellBasell Industries N.V. LYB has an Earnings ESP of +2.37% and carries a Zacks Rank #3.

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