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Why Is Steel Dynamics (STLD) Down 7.6% Since Last Earnings Report?

Zacks Equity Research
American Water Works (AWK) might move higher on growing optimism about its earnings prospects, which is reflected by its upgrade to a Zacks Rank 2 (Buy).

It has been about a month since the last earnings report for Steel Dynamics (STLD). Shares have lost about 7.6% 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 drivers.

Steel Dynamics' Q1 Earnings Miss, Sales Top Estimates

Steel Dynamics logged net income of $204.3 million or 91 cents per share in first-quarter 2019 results, down from $227.6 million or 96 cents in the year-ago quarter. Also, the figure trailed the Zacks Consensus Estimate of 92 cents.

Net sales in the quarter increased around 8% year over year to $2,817.4 million. The figure beat the Zacks Consensus Estimate of $2,811.8 million.

Per the company, consistent improvement and stabilization in flat roll steel prices are having a favorable impact. This resulted in higher flat roll order activity and strong order backlogs. The company is also seeing continued strength in the energy, automotive and industrial sectors.

Segment Highlights

Net sales from steel operations went up around 10.6% year over year to $2,124.6 million in the first quarter. Operating income fell roughly 7.7% year over year to $312.4 million. Average product selling price increased around 9.7% year over year to $902 per ton in the reported quarter. Steel shipments rose around 5.9% year over year to 2.7 million tons.

The company's fabrication operations raked in sales of $228.5 million, up around 13.4% year over year. Operating income rose roughly 4.2% year over year to $20.7 million.

Net sales from metals recycling operations declined around 9.5% year over year to $351.1 million. Operating income fell around 28.2% year over year to around $20 million.

Financial Position

As of Mar 31, 2019, Steel Dynamics had cash and cash equivalents of around $791.4 million, down roughly 19.7% year over year. Long-term debt was $2,354.4 million, down from $2353.7 million in the year-ago quarter.

The company generated cash flow from operations of $181.6 million in the quarter, up 2% year over year.

The company also repurchased shares worth $84 million during the first quarter. Moreover, the board of directors approved a 28% hike in first-quarter 2019 cash dividend, which indicates the company’s strength of capital and liquidity profile.

Outlook

The company expects domestic steel consumption to continue rising in 2019. Steel Dynamics expects North American steel consumption to witness steady growth, supported by domestic steel demand fundamentals along with customer optimism.

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 existing 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 likely 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 fresh estimates. The consensus estimate has shifted -9.11% due to these changes.

VGM Scores

Currently, Steel Dynamics has an average Growth Score of C, 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 B. 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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