Please ensure Javascript is enabled for purposes of website accessibility

Why Mechel PAO Stock Just Jumped 10%

By Rich Smith - May 31, 2017 at 11:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Look closely at the numbers to get the real story.

What happened

Shares of Russian mining and steelmaking company Mechel PAO (MTL -2.17%) jumped in early trading Wednesday, rising to 10.1% as of 11 a.m. EDT.

So what

Mechel reported its fiscal first-quarter 2017 earnings results this morning. With coal production volumes down 10% year over year but pig iron up 4% and steel up 10% by volume, Mechel reported 24% growth in revenue to 77.4 billion Russian rubles (RUR) year over year.

Operating profits surged 186% to RUR 18.1 billion, and net profits were RUR 13.9 billion -- a staggering 43.6 times increase over first-quarter 2016, which works out to $244.6 million profits at current exchange rates (roughly 57 RUR to US$1).

A steel foundry at night

Image source: Getty Images.

Now what

In the earnings report, CEO Oleg Korzhov deadpanned that the results looked "good" to him. Korzhov noted that "favorable price trends had their positive impact," with Mechel benefiting especially from high prices from premium coking coal and iron ore, while the company's steel business turned in a "robust performance."

And I have to say that Mechel stock is looking pretty good as well -- at least at first glance. Valued on trailing earnings of $367 million, Mechel's $1.06 billion market capitalization works out to a P/E ratio of just 2.9. Valued on trailing free cash flow of $936 million, the stock sells for a multiple of just 1.1 times cash profits. If these numbers look a bit too good to be true, though, that's because they are.

When valuing Mechel, you see, you really must take into account the company's mammoth debt load -- $8.5 billion net of cash on hand. Adjusted for this debt, Mechel's valuations work out to more than 23 times earnings and more than 10 times free cash flow.

For a company that most analysts expect to have declining earnings over the next couple of years, those may be too steep a price to pay.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Mechel PAO Stock Quote
Mechel PAO
$2.25 (-2.17%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.