Don't Skip the Scrimpers of Scrap

By their very nature, scrap metal recyclers are adept at extracting value from every last ounce of opportunity. As export demand for both ferrous (think: steel and iron) and non-ferrous (copper, aluminum, etc.) scrap metals continues to gather steam, these consummate scrimpers are deftly shaking pennies out of the scrap heap.

With the noteworthy exception of Schnitzer Steel (Nasdaq: SCHN  ) , you wouldn't necessarily know it from the group's collective share performance. Both Sims Metal Management (NYSE: SMS  ) and small-cap scrapper Metalico (AMEX: MEA  ) ended 2010 essentially flat with where they started the year. Shares of steelmaker Nucor (NYSE: NUE  ) , whose margins are squeezed by rising scrap metal prices, shed about 10% during a solid year for stocks overall.

Unfortunately, even Schnitzer Steel's knock-out 177% increase in income from continuing operations for the company's fiscal first quarter of 2011 came in beneath analysts' expectations. Shares tumbled 7% Friday after Schnitzer's income of $0.64 per share missed the consensus by $0.07. However, the company expects price increases for these products to maintain their upward trend, and with the potential for ferrous prices to "increase significantly," scrimping Fools may wish to hunt for value in the scrapyard.

Meanwhile, both Schnitzer Steel and competitor Commercial Metals (NYSE: CMC  ) have been hampered by persistently weak demand for the finished steel products they create from their processed scrap. Schnitzer's steel manufacturing reported a small loss for the fiscal first quarter, suffering a 2% decline in sales volumes. The company expects another break-even result for the ongoing second quarter. Commercial Metals offered some insightful context to accompany a $22 million operating loss from its fabrication unit, explaining: "Commercial construction was weak, steel costs have risen, and recently announced steel price increases will drive margins down further in the short run. The Western region of the U.S. remains the most problematic."

The big picture for scrap demand may just be bullish enough to offset weakness in those fabrication segments. As equipment manufacturer Joy Global (Nasdaq: JOYG  ) had done before it with respect to the copper market, Schnitzer Steel focused upon China's newly released 5-year development plan as a significant indicator of increasing export demand for scrap metals. As it is, seaborne exports already account for 80% of Schnitzer's ferrous sales volumes.

During the fiscal first quarter, Schnitzer enjoyed a solid 21% operating margin within its auto parts segment, in part because scrap prices rose more quickly than the prices it paid for junked autos. Strong retail demand for parts also played a role, perhaps corroborating my 2009 forecast for a "shift to thrift" in the United States -- offering a boon to auto recyclers like Schnitzer.

Although I am personally underweight the domestic industrial sector at large, I have taken a shining to Schnitzer Steel on the basis of a business model that extracts value at every step in the supply chain. I look forward to hearing your thoughts on the company in the comments section below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. Nucor is a Motley Fool Stock Advisor pick. The Fool owns shares of Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scrappy disclosure policy.


Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 4:08 PM, highpoint1 wrote:

    Besides missing the target, the analyst's did not

    forecast increasing revenues for Schnitzer due

    to the US economy. SMS has been dragged

    down over the last couple of days along with

    Schnitzer as per WSJ article today.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1420210, ~/Articles/ArticleHandler.aspx, 11/21/2014 3:44:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement