Steel Technologies' Solid Outlook

Last week, I penned an article on the troubles facing Virginia-based construction company Williams Industries (Nasdaq: WMSI) with skyrocketing prices for the raw materials it uses to make bridge components. But every coin has two sides, right?

And the coin I am thinking of today is a 1943 steel penny. So, let's take a look at one of the companies that may profit from the same rising steel prices hurting Williams.

Steel Technologies (Nasdaq: STTX) manufactures flat rolled steel which it distributes in the U.S. and Mexico. On Friday, the company predicted that its fiscal second quarter, which ends on March 31, will see a 34% increase in sales and at least a 200% increase in earnings over the year-ago quarter.

Now, it's important to understand that steel does not just grow on trees. (It actually grows under trees.) At some point, after being dug out of the ground as iron ore, a "primary processor" processes raw steel into "commercial tolerance steel" coils. It then sells this product to Steel Technologies for further processing to the specifications of Steel Technologies' customers, including end users like Williams.

Steel Technologies pointed out in its press release that "a portion" of its earnings boost this year was due to the rising cost of the steel coils it buys for reprocessing. The company had considerable stockpiles laid up at the beginning of the quarter, and thus appears to have been able to mark up the cost of its finished product to steel consumers like Williams, without immediately incurring additional "cost of goods" for its own raw materials.

But in future quarters, as Steel Technologies runs down its inventories, investors should expect its gross margins to contract as the company starts paying higher and higher raw materials costs itself.

So earnings are up dramatically this quarter, but likely to go down next. This, ladies and gentlefools, is why steel is considered a "cyclical" industry.

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Motley Fool contributor Rich Smith owns shares in Williams Industries, but none in Steel Technologies. The Fool has a disclosure policy .