Put Steel In Your Portfolio With Steel Dynamics

Steel Dynamics Posts Record Quarter And Favorable Guidance 

If you want to put some steel in your portfolio look no further than Steel Dynamics (NASDAQ: STLD). The company is engaged in the recycling, processing, fabrication, and sales of steel to the construction and industrial complex and just posted a record quarter. The record results, as good as they are, aren’t the whole story either. The stock, like its competitors, is trading at historically low valuations that make it a deep value compared to the broad market and one that pays a healthy 1.8% dividend. While it is possible to find higher-yielding stocks that offer comparable if not equal value few are as safe and healthy as Steel Dynamics’. The company is paying out a mere 5.5% of the earnings outlook, an outlook that was just put to shame, and the outlook for distribution growth is robust. The company has been increasing the payout for the last 12 consecutive years and at a 15% CAGR that we see extending to a 13th and 14th year in calendar 2022 and 2023. 

Steel Dynamics Is Fundamentally Sound 

Steel Dynamics had a fantastic quarter supported by expansion, volume, and pricing. The company reported $6.21 billion in net revenue for a gain of 38.9% on top of last year’s 113% gain and more than double the pre-pandemic comparison. The revenue also beat the Marketbeat.com consensus estimate by 475 basis points and we see similar strength unfolding in the current and following quarters. In terms of steel and steel production, the company reports a record 3.1 million tons of total steel shipments and a record 218,000 tons of fabricated steel. The only bad news is the average selling price for steel fell slightly but that was offset by leveraged gains versus fixed costs and internal efficiencies that led to wider gross and operating margins. 

Moving down to the income, the company’s gross margin improved by 340 basis points and the operating margin by 460 basis points to drive record results for operating income, net income, and cash flow. On the bottom line, the $6.44 in GAAP and $6.73 in adjusted earnings are nearly double the levels set last year and margins may even improve in the coming quarters. The company did not give any formal guidance for revenue or earnings but says the backlog remains near record levels, new orders are strong, and demand for fabricated steel products has upward pressure on the forward pricing. To paraphrase company execs, we expect to see this momentum carry into 2023 at least. 

"Customer order entry activity continues to be healthy across all of our businesses, conflicting with the more pessimistic emotion in the marketplace," said CEO Mark D. Millett. "Despite softening flat roll steel pricing, our steel order activity remains solid from the automotive, construction, and industrial sectors, with energy continuing to improve. Our steel fabrication operations order backlog remains at near-record volumes and forward pricing levels. This combined with continued healthy order activity and broad customer optimism, supports strong overall demand dynamics for the construction industry.

The Technical Outlook: Steel Dynamics Rebounds From Bottom 

The price action in Steel Dynamics hit a bottom a few weeks before the Q2 results were released and now the stock is in rebound mode. The price action is up nearly 3.0% in premarket action and has the market above the short-term EMA if only barely. Assuming the market follows through on this move we see the stock advancing to the $75 level before hitting major resistance and then drifting up toward the consensus target of $91, a consensus target that has been moving higher over the past 12, 3, and 1-month periods.