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Why Is Steel Dynamics (STLD) Down 8.18% Since Last Earnings Report?

Zacks Equity Research
Zacks Earnings Trends Highlights: W.W. Grainger and Fastenal

It has been about a month since the last earnings report for Steel Dynamics (STLD). Shares have lost about 8.18 % in that time frame, underperforming the market.

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 the most recent earnings report in order to get a better handle on the important catalysts.

Steel Dynamics' Q2 Earnings and Sales Top Estimates

Steel Dynamics logged profit of $362.4 million or $1.53 per share in second-quarter 2018 up from $153.9 million or 63 cents a year ago. Earnings beat the Zacks Consensus Estimate of $1.49.

Earnings were primarily driven by the company’s flat roll operations as strong demand continued to boost margins.

Net sales in the quarter went up around 29.3% year over year to $3,090.5 million, surpassing the Zacks Consensus Estimate of $2,890 million.

The company witnessed improved product pricing and demand across the entire steel portfolio, which resulted in strong margin expansion and steel shipments.

Segment Highlights

Net sales from the company's steel operations went up roughly 32.3% year over year to $2,325.4 million. Operating income rose roughly 96.2% year over year to $537.2 million. Average product selling price for the unit increased around 19.6% year over year to $932 per ton in the quarter.

The company's fabrication operations raked in sales of $217.4 million, up around 9.9% year over year. Operating income fell roughly 29.7% to $14.2 million.

Net sales from metals recycling operations rose around 23.6% year over year to $424.7 million. Operating income increased around 28.7% year over year to $25.7 million.

Financial Position

Steel Dynamics ended the quarter with cash and cash equivalents of around $720.4 million, down roughly 20.7% year over year. Long-term debt was $2,352.1 million, flat year over year.

The company generated cash flow from operations of $326 million in the quarter.

Outlook

Steel Dynamics reiterated that the market and macroeconomic conditions are positioned to benefit domestic steel consumption and believes that steel consumption will continue to be strong for the remainder of 2018.  

The company believes that the recent Heartland buyout is likely to result in future earnings benefit to Heartland's current operations and its broader Midwest flat roll operations. Steel Dynamics is integrating Heartland into its Midwest flat roll operations and plans to focus on value-added, lighter gauge flat roll production at Heartland.

Moreover, the company intends to boost production during second-half 2018 to roughly 40,000 tons per month. Notably, it expects third quarter earnings contribution to be reduced by roughly $12-$15 million as a result of value accounting adjustments. However, it believes that the benefits of Heartland acquisition will boost its EBITDA between $50 million and $60 million per annum on a through-cycle basis.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Steel Dynamics has a great Growth Score of A, though it is lagging a lot on the Momentum front with a C. However, the stock was also 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.

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

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


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