Schnitzer Steel Is Pumping Iron

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Eating your spinach is not enough: Pumping iron is the way to build muscle. Just look at Schnitzer Steel (Nasdaq: SCHN  ) . It's pumping more iron lately than it ever has before, and it shows.

Schnitzer hoisted a solid fiscal third quarter of 2011 with earnings of $1.17 per share, and it bench-pressed its way to sequential gains of 36% for revenue and 20% for operating income.

I wish I could portray this result as an indication that recently heightened concerns over a slowing U.S. economy might be overblown, but I cann't. You see, more than 71% of Schnitzer's total sales in the quarter came from the sale of ferrous (iron) scrap metal, and fully 78% of that ferrous sales volume sailed the seven seas en route to buyers in China, South Korea, Turkey, and elsewhere. Competitor Commercial Metals (NYSE: CMC  ) , by contrast, reported a drop in ferrous export volumes, citing unrest in the Middle East.

With scrap-metal operations doing the heavy lifting for Schnitzer's profitability, the company has executed seven scrap-metal-business acquisitions so far this fiscal year, among an aggressive spate of 10 acquisitions overall. CEO Tamara Lundgren observed, "We have begun to realize the benefits of the additional market scale from these investments." Oddly, even as Schnitzer's latest result logged an 83% improvement over its first fiscal quarter, the stock has suffered fairly steady deterioration since that January disappointment.

It looks to this Fool as though Schnitzer Steel continues to build muscle behind the scenes, while the market refuses to recognize its surging strength. Schnitzer's steel-manufacturing unit continues to wallow in weakness amid a persistent slump in domestic construction demand, but the company's auto-parts segment has flexed its biceps with a 9% sequential increase in operating income. Meanwhile, metal-scrapping pure play Metalico (AMEX: MEA  ) has outperformed its peers in 2011, thanks to some iron-fisted earnings growth, featuring a 216% sequential gain for the first quarter of 2011.

So long as leading iron ore suppliers such as Vale (NYSE: VALE  ) and BHP Billiton (NYSE: BHP  ) continue to report robust pricing and global demand for their product, I believe that ferrous scrap recyclers such as Schnitzer Steel have a strong shot of lifting their own weight within a Fool's investment portfolio.

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. We Fools don't 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 disclosure policy.

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