Headwinds Dampen The Outlook For Worthington

Perfect Positioning Is A Two-Edged Sword For Worthington

Worthington NYSE: WOR is perfectly positioned for the post-pandemic world. The company makes value-added steel products for manufacturing industries of all varieties, as well as consumer goods and materials for the construction industry. The company is also perfectly positioned to feel the impact of systemic headwinds within the economy. Headwinds like labor shortages, rising labor costs, freight disruptions, and even the semi-conductor shortage. So, Worthington’s results are great but provide further evidence to a strengthening theme for the Q3 earnings cycle. Systemic headwinds are cutting into the top and bottom line and having an impact on the outlook.

“The Company is performing well, and while demand from our major end markets remains healthy, we will likely continue to face labor challenges and be impacted by lower automotive demand due to the ongoing semi-conductor shortage. Despite this, we are off to a great start for fiscal 2022 and I’m confident our teams will continue to navigate these challenges and deliver for our customers," said Andy Rose, President and CEO.

Worthington’s Great Quarter Could Have Been Better

Worthington had a great quarter supported by strong demand in most of its end markets. The company reported $1.11 billion in net revenue which is good for a gain of 57.9% over last year. The revenue beat the consensus by 1300 basis points and drove strong results on the bottom line as well but remain down on a two-year basis.  Revenue strength is supported by higher selling prices for steel which are expected to continue for the foreseeable future. On a segment basis, steel processing led the group with a gain of 94% over last year. The building segment saw its revenue grow by 30.3% while the consumer products segment lagged at 10.4% and the sustainable energy solutions segment saw its revenue decline slightly.

“We again delivered record adjusted earnings per share, led by exceptional results in our Steel Processing segment,” said Andy Rose, President and CEO.  “We had solid demand across our major end markets but also continued to face challenges with customer shut-downs due to semi-conductor and other parts shortages, labor availability, and tight supply chains which prevented the quarter from being even better.”

Moving down the report, the company saw an expansion in the margin at both the gross and operating levels that was underpinned by the increase in steel prices. The company’s gross margin came in at 19.9% while operating margin came in at 12.3% to drive solid results on the bottom line. The company’s Q1 adjusted earnings of $2.46 increased by 32% over last year to beat the consensus by $0.61. On a GAAP basis, earnings made a substantial decline but there were some significant factors in play including a stake in Nikola so those comparisons are useless.

Worthington’s Dividend Is Easy To Like

Worthington pays a nice 2.0% dividend that we view as safe and growing. At the current level, Marketbeat.com data shows the company is paying out less than 25% of its earnings and comes with an 11-year history of dividend increases and a relatively healthy balance sheet.  The company's cash position and free cash flow could be a little better but there's plenty of value tied up in the supply chain to offset that and its cash flow and free cash flow are noticeably better than in the previous year. Also of note, the most recent dividend increase came sooner than expected which suggests to us company fundamentals are in good shape.

Technical Outlook: Worthington Is At A Bottom

Worthington’s fiscal Q1 report sparked a surge in share prices that took them well above the short-term moving average. The bad news is that sellers pushed price action back down to below the moving average and the previous day's close in an indication of fierce resistance. In our view, the days selling raises a red flag but we don't see this stop moving much lower. As it stands, price action is forming a head and shoulders reversal pattern at the $52 level that we see progressing over the near term. Today's action tested and establishes a neckline for this pattern at the $56 level that we see soon surpassed. Assuming price action is able to drift upwards and move above the $56 level, we see this stock moving up to the $60 level and then consolidating before a move higher later in the year.  Systemic headwinds are having an impact on the quality of results now but will help the company continue to sustain high levels of revenue far into the future.