Steel Dynamics: Zacks’ Bull of the Day Play

Steel Dynamics (STLD – Snapshot Report) as I write this Bull of the Day, STLD is a Zacks Rank #2 (Buy) and we usually focus on Zacks Rank #1 (Strong Buy) for this article. Why would I do a #2 and not a #1, well the company recently raised guidance and I expect the analysts to boost their numbers yet again. For that reason, STLD is the Bull of the Day today.

Guiding Higher

Last week, STLD came out and indicated that the third quarter was a very good one. The company released guidance for the recently completed quarter as a range of between $0.42 and $0.46. At the time, the broader market was expecting $0.38.

The higher guidance is likely going to prompt analysts to increase their estimates. Earnings estimate revisions are a key driver of the Zacks Rank. If all the analysts move their numbers higher, then we say there is agreement among the analysts and that is another key component of the Zacks Rank.

Company Description

Steel Dynamics is a diversified carbon-steel producer, metals recycler and one of the largest American steel companies. The company has 6,600 employees and is headquartered in Fort Wayne, Indiana.

Tight In The Shorts?

The NASDAQ release short interest information periodically and I want to examine a recent move in short interest. At the end of May, there were just under 7M shares of STLD sold short. Yet two weeks later, that number was cut to 3.2M. What would cause more than 50% of the shorts to cover?

Many would point to general strength in the global economy as it is a steel producer. Some would even suggest that shorts who likely do more work on the investing side than longs anticipated the company issuing guidance on 6/16.

What drove the big swing is not really known, but it didn’t keep the shorts from losing money.

A quick look at the chart shows that the stock launched higher late July. Just before that, the short interest had basically bottomed out at 2.9M shares and has since been climbing back toward the May highs. So why the big jump at the end of July?

Severstal Columbus Deal

The reason for the big move in the stock toward the end of July is the $1.625B deal for Severstal Columbus from OAS Severstal. That deal expanding the annual steel shipping capacity to 11M tons, which is an increase of 40%. The deal really opens the company up to the oil transport market, which is still booming in the Bakken and the Permian Basin.

STLD Sees Estimates Moving Higher

The estimates for STLD started out this year a little high and have since come down. The Zacks Consensus Estimate was calling for $1.31 in January and skidded down to $1.13 in April. The number kicked back higher to $1.46 in August and only recently saw a positive move to $1.18 which helped make it a Zacks Rank #2 (Buy) stock. Now the analysts are all going to be raising their numbers off the guidance, so don’t be surprised if this stock becomes a #1 (Strong Buy).

Next year, the numbers are really starting to move higher. In June the Zacks Consensus Estimate was calling for $1.71, just about where it started the year. But since that time, the number has seen several positive revisions, moving to $1.80, then $1.86 and now it’s at $1.94. It will be interesting to see if the 2015 number moves up as dramatically as the guidance for the next quarter.

Valuation

On the valuation side, we are paying up for some steel. The PE, both trailing and forward shows a big premium to the industry average… but I expect that average to lift as the whole industry is doing rather well lately. The price to book multiple of 2x is above the 1.4x industry average, but not by too much. The price to sale multiple of 0.8x is the only metric showing STLD trading at a discount to the industry average which stands at 1.1x.

Clearly, 2015 is the year for STLD and getting in a few weeks before a strong quarter is not a bad idea. The story is 21% topline growth next year compared to 4% for the industry average and 65% growth in earnings compared to 35% for the industry.

The Chart

The price and consensus chart is a very helpful tool developed by Zacks. It shows how the earnings estimates help guide the stock, so as estimates move higher, the stock price generally follows along. STLD as a Zacks Rank #2 (Buy) is no exception to that idea. The recent move much higher in earnings is likely to help guide stock to new highs.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

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