If you have been following the latest string of earnings releases from the nation's steel companies -- Schnitzer (Nasdaq: SCHN), Reliance (NYSE: RS), Steel Technologies (Nasdaq: STTX), Nucor (Nasdaq: NUE), Steel Dynamics (Nasdaq: STLD), and Textron (NYSE: TXT) spring to mind --you almost certainly have the impression that this is a can't-lose business. But finally, one company has dared to be different in proving that, yes, steel companies really can still lose money.
On Friday, Allegheny Technologies (NYSE: ATI) announced that the higher costs of raw materials used in its business of manufacturing specialty metals -- primarily stainless steel and alloys of nickel, cobalt, titanium, and tungsten -- combined with its use of the last-in, first-out (LIFO) accounting system, will exacerbate first-quarter losses. Instead of the expected loss of $0.10 to $0.14, Allegheny will post a loss of $0.60 to $0.70 per share.
The fact that Allegheny operates on LIFO is important. If Allegheny buys a load of titanium in June and another load in December, and uses up one load's worth of titanium in manufacturing a delivery of titanium alloy sheet for sale in January, its gross profit is the sales price minus the cost of the December load of titanium.
Were Allegheny to operate on a first-in, first-out (FIFO) system, however, it could subtract the cost of earlier-purchased raw materials from its sales price. With metals prices rising, Allegheny would likely book an outsize profit as it sells goods bought on the cheap at today's inflated prices.
Last year, Tom Jacobs pointed out that in "inflationary times" -- as today's times certainly are for steel companies and their cousins -- LIFO is a more conservative accounting method than FIFO. So, Allegheny is to be commended for sticking to conservative accounting when it must surely be tempted by the ease of "creating" paper profitability with a switch to FIFO.
Nonetheless, the fact remains that most of the steel companies that have been reporting earnings lately use LIFO just like Allegheny does. But in contrast to Allegheny, they have managed to earn profits despite this handicap. You have to wonder whether Allegheny shareholders are starting to feel like they are missing out on the party.
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Fool contributor
Rich Smith
has no interest in any of the companies mentioned in this article.
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