Meet the Metal Maestros

If you own shares of a metal recycler, I imagine your screen is looking pretty green.

Pretty much everyone in the space, from Schnitzer Steel (Nasdaq: SCHN  ) to Metalico (AMEX: MEA  ) , is trading higher today, in response to positive news on multiple fronts.

First, we have the stellar results out of Commercial Metals (NYSE: CMC  ) , which just reported this morning. You have to back out the company's non-cash charge on inventories (a product of last-in, first-out accounting rules) to see the true strength of these earnings. Ferrous scrap prices have escalated, but finished steel products such as rebar are more than keeping pace and allowing margins to fatten. Demand abroad has also cut down on scrap steel imports, a development that further strengthens the position of domestic players.

On another front, it appears that the slew of analysts covering Sims Group (NYSE: SMS  ) has significantly underestimated the Aussie company's earning power in today's strong market for scrap steel. In a statement today, the company -- which, along with Nucor (NYSE: NUE  ) , is a top metal recycler worldwide -- noted that the average Street estimate for Sims' full fiscal year is too low. There's only one quarter to go, so the implications for the current quarter become magnified.

Specifically, the full-year estimate is for $314 million in earnings. Backing out the past three quarters gives us an estimate of $132 million for the current and final quarter of the fiscal year. Sims says it will exceed the full-year estimate by more than 10%-15%. That means fourth-quarter earnings are probably coming in at least 35% higher than expected -- possibly better. Sims is looking far from slim.

Aside from my admiration of the man running Sims' North American operations (the former Metal Management), the macro environment for scrap recyclers is tough to beat. For that reason, I have outperform ratings on both Sims and Metalico in Motley Fool CAPS. Check out what other players have to say about either company, and it should be clear why these metal players are so dear.

Related Foolishness:

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 18, 2008, at 5:27 PM, XMFSinchiruna wrote:

    Well said, Toby! Like railroads and dry bulk shipping, metals recycling is one of those 'boring' industries that quickly becomes anything but in a global commodities super cycle. Kudos to all the CAPS players who have recognized this!

  • Report this Comment On June 27, 2008, at 8:28 PM, luvb2b wrote:

    IDSA just pulled a similar stunt, guiding this quarter's earnings nearly 50% higher than the previous quarter. Same industry, smaller stock.

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