For more than a year now, Canadian steel processor Novamerican Steel (NASDAQ:TONS) has consistently trounced the earnings estimates posited for it by Wall Street's best and brightest. Tomorrow, analysts have set the bar low and are only looking for the firm to earn a fraction of what it netted one year ago. Can Novamerican rise to the occasion once more when it reports its Q4 2006 numbers?

What analysts say:

  • Buy, sell, or waffle? Only three analysts follow Novamerican. All vote "hold."
  • Revenues. On average, the analysts expect sales to be down 1% versus last year at $198 million.
  • Earnings. But they are looking for $0.78 per share in profits on Tuesday -- 42% worse than last year.

What management says:
The big news at Novamerican this quarter was of the sort that often chills an investor's heart: a C-level resignation. Specifically, the departure of Novamerican Chief Financial Officer Christopher Pickwoad (who was replaced by Larry Cannon, formerly CFO of Euromoney subsidiary BCA Publications) in late November. Investors probably need not worry, however. Pickwoad remains on Novamerican's board of directors, and ordinarily, when there's monkey business afoot, companies don't let the executives involved hang around on the board.

Other than the management change, Novamerican has said little of interest over the past three months (at least that it's filed with the SEC). Before that, the most recent filing just describes last quarter's earnings. To refresh your memory on how those went, just click here.

What management does:
Over the past six months, Novamerican's sales are up 8% while cost of goods sold has risen only 3%. While we can't applaud the outsized growth in selling, general, and administrative costs (up 12%), the fact that raw materials dwarf these costs in significance means Novamerican has been able to keep its gross, operating, and net margins all rising ever higher.

Margins %

5/05

8/05

11/05

2/06

5/06

8/06

Gross

20.3

17.2

15.3

15.2

15.7

17.0

Op.

12.4

9.1

7.3

7.0

7.4

8.5

Net

7.6

5.6

4.4

4.3

4.7

5.4
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.

The Fool says:
Now for the bad news. In a reversal of the trend we saw just three months ago, Novamerican's balance sheet shows that accounts receivable growth has almost caught up to sales growth, and inventories, instead of falling, are outpacing sales growth at 34% year over year. Not that this bad news is limited to Novamerican; in recent months there have been rumblings of similar inventory problems out of steelmaking giants Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) as well.

Tomorrow, we'll be looking for further evidence of which way the steel wind is blowing. Are inventories back in hand at Novamerican, or is the problem worsening (there and elsewhere)? Tune in to the Fool to find out.

Competitors:

  • Gibraltar (NASDAQ:ROCK)
  • Olympic Steel (NASDAQ:ZEUS)

Customers:

  • Ford (NYSE:F)
  • GM (NYSE:GM)

What did we expect out of Novamerican last quarter, and what did it produce? Find out in:

Still not sure whether you should invest in Novamerican? Get the president's own views on the firm's future in our recent interview with Scott Jones.

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