As much of Wall Street begins to roll out its Q4 numbers for 2006, metals processor Steel Technologies (NASDAQ:STTX) has already moved on and entered the new year. Fiscal Q1 2007 earnings results are due out bright and early Tuesday morning.

What analysts say:

  • Buy, sell, or waffle? Only three analysts follow Steel Technologies, and boy, are they glum. Two rate the stock a hold, and the third a sell.
  • Revenues. On average, they're looking for flat sales of $212.7 million.
  • Earnings. Profits are predicted to fall 12% to $0.22 per share.

What management says:
Steel Technologies' most recent quarterly release involved "preliminary" numbers, because the company intends to restate earnings. The company said the restatement will increase shareholders' equity without affecting reported cash flow or revenues; its effect upon net income isn't yet known. Still, the firm sounded a cautionary note when reporting preliminary fiscal Q4 earnings back in October.

It warned that the steel-processing sector is becoming "more competitive," and that "reduced automotive schedules put pressure on our operating margins." Presumably, a reduced need for steel leads to less volume processed, which means less room to spread around fixed costs. Looking forward to next week's results, management warned that fiscal Q1 volumes would approximate those of fiscal Q4 2006.

What management does:
Bad news? Not necessarily, because last quarter wasn't all that bad. The firm put together its second back-to-back quarter of rising rolling gross, operating, and net margins. Things aren't looking nearly as good as they were last year, of course, but the numbers are at least heading in the right direction again.

Margins %

6/05

9/05

12/05

3/06

6/06

9/06

Gross

11.2

9.0

7.6

6.1

6.3

6.7

Op.

7.8

5.7

4.3

2.6

2.8

3.3

Net

5.1

3.8

2.6

1.4

1.5

1.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Higher operating costs might not do much to interrupt this trend, either -- at least, not if the firm continues to benefit from lower input costs. Over the last six months, the firm has experienced the same kind of flat sales that analysts predict it will report on Tuesday. Meanwhile, the cost of goods sold (COGS) has declined 2%, and selling, general, and administrative costs (SG&A) are up less than 4%. With SG&A making up a much smaller portion of the firm's revenues, though, what happens near the top line -- that COGS figure -- will affect Steel Technologies' margins far more.

I'm even more concerned about the balance sheet. There, we see strong control over accounts receivable, which fell 6% year over year for the last six months. That's a good thing, but a 26% rise in inventories definitely isn't. The greater the amount of commodity steel inventories lying around in this industry, the more selling prices will be pressured for everyone. That risks reducing Steel Technologies' gross margins, even if COGS remains low. Investors should keep an eye on those margins and inventories when the company reports on its first quarter.

Competitors:

  • AK Steel (NYSE:AKS)
  • Material Sciences (NYSE:MSC)
  • Reliance Steel (NYSE:RS)

For related reading, try:

Fool contributor Rich Smith does not own shares of any company named above.