Steel Dynamics Is A Value That Should Not Be Passed Up

Record Demand Drives Record Results For Steel Dynamics

We were expecting a solid report from Steel Dynamics NASDAQ: STLD and we were not disappointed. The company is experiencing record demand for steel products and fabrication and that is driving record results. More importantly, a record backlog for fabrication and high levels of customer confidence are pointing to another solid year in 2022. Add to that a very healthy dividend, an outlook for dividend growth, a ridiculously low valuation, and the expectation for share repurchases and this stock becomes a no-brainer.

"Domestic steel demand was strong throughout the year supported most significantly by the construction, automotive, and industrial sectors," said CEO Millett. "Customer steel inventories also remained historically low, as steel supply was not sufficient to meet robust demand requirements during much of the year … based on domestic steel demand fundamentals and customer confidence, we believe North American steel consumption will experience steady growth, supported by the construction, automotive, and industrial sectors.”

Steel Dynamics Has Record-Setting Quarter 

Steel Dynamics topped off a record-setting year with a record-setting 4th quarter that produced $5.31 billion in net revenue. The revenue is up 104.2% from last year and is driven by demand and pricing. While the company experienced a seasonally expected downtick in volume it was less than expected and coupled with a 7.2% increase in external pricing for finished materials. Moving down, the company was able to improve margins in all segments as well and that drove better than expected results on the bottom line as well. On the bottom line, the company’s $5.49 in GAAP EPS compares to last year’s $0.89 while the adjusted $5.78 compares to $0.97 last year and beat the Marketbeat.com consensus by $0.07. 

The company is putting its cash flow to good use paying for expansion and delivering capital to shareholders. In regards to capital returns, the company pays a healthy 1.9% dividend yield with shares trading near $55.00 while providing an ultra-deep value. The stock is trading at only 3.4X its 2021 earnings and less compared to the expectations for 2022 which is a screaming deal. There is a risk the metals sector will remain at low valuations relative to the broad market but we don’t think so. 

As for dividend safety, the company is paying out roughly 6% of its earnings, and earnings are unencumbered by debt. In our view, the company not continue its aggressive high-double-digit pace of dividend increases but we are still expecting future dividend increases and double-digit ones at that. The next increase is expected with the next declaration and then there are the buybacks to consider. The company has not announced specific buyback plans for 2022 but it did buy back $1.1 billion or about 8% of shares in 2021 and there is no reason to think repurchases won’t continue in 2022.  

The Technical Outlook: Steel Dynamics Is Trading At An Extreme Low 

Shares of Steel Dynamics were in consolidation going into the earnings release and fell sharply just the week before it was released. Price action has since put in what looks like a bottom but it might be too soon to tell. The indicators are diverging from the new lows which suggest overextension and the potential for a rebound while the earnings also support the same outlook. In our view, price action should at least hold at current levels if not snap back sharply. Longer-term, we see this stock moving back up to the $70 levels and then extending the post-COVID rally to new highs.