Wall Street's buyback binge continues. Toward the end of last month, we discussed billion-dollar-plus buyback programs initiated byAnalog Devices,Symantec, Staples (Nasdaq: SPLS ) , Target (NYSE: TGT ) , and Best Buy (NYSE: BBY ) . As last week drew to a close, one last firm jumped on the buyback bandwagon. Steel Dynamics (Nasdaq: STLD ) announced a re-up on its own repurchase plan, last expanded in November 2006.
In a press release issued Friday, Steel Dynamics (SDI) advised that it had exhausted its authorized repurchases in June, but wanted to continue a buyback program that has removed 30 million shares from the public markets over the last three years. To keep the momentum rolling, the company's board authorized the repurchase of another 5 million shares.
Impressive numbers for a firm that had just 94.5 million shares outstanding at last report. But can Steel Dynamics afford to keep this up? Perhaps more importantly, should it? That's what we're here to find out.
Can it pay?
According to CEO Keith Busse SDI generates "strong free cash flows," has a strong balance sheet, and a "healthy long-term financial outlook."
Actually, SDI's balance sheet looks a little bottom-heavy to me, with just $28 million in cash, versus $358 million in long-term debt. The firm won't be able to finance the entire repurchase program (which would cost $220 million at the current share price) with cash on hand. That said, SDI generated $248 million in free cash flow over the last 12 months, which should enable them to comfortably make the purchases.
Should
it pay?
On Busse's third point, the "healthy financial outlook," I note that analysts are projecting just 5% long-term profits growth for the company, which is earning bumper profits. That will be key when we address the question of whether SDI should do its buyback.
Let's compare the company to a few of its rivals:
|
P/E
|
Price-to-Free Cash Flow
|
Projected Growth Rate
|
|
Steel Dynamics
|
11
|
17
|
5%
|
|
Nucor (NYSE: NUE )
|
10
|
9
|
7%
|
|
U.S. Steel (NYSE: X )
|
10
|
11
|
4%
|
The way I see it, the only company of this lot that looks even close to fairly valued is Nucor, whose P/E and P/FCF ratios are both approximate its anticipated long-term growth rate. Stanley, though, is definitely "up there" in terms of price, consistently generating significantly fewer cash profits than it gets to report as net earnings under GAAP.
When all is said and done, I don't see this as a great deal for shareholders. The value proposition just isn't there. Rather than a buyback, I suspect the better move for Steel Dynamics at this time would be to pay down a bit of its debt load, or perhaps use its cash to buy a weaker rival -- and juice that growth rate out of the single digits.
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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.
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