What happened
Shares of steel minimill operator Steel Dynamics (STLD +0.77%) threw investors for a real loop on Tuesday. After the company warned on second-quarter earnings in an earnings pre-announcement Monday evening, its stock initially sank in after-hours trading. The next day, however, Steel Dynamics shares reversed course and gained as much as 10% in midday trading, ultimately closing the day up 9%!
Why?
Image source: Getty Images.
So what
At the beginning (the earnings warning), the Ft. Wayne, Ind.-based Steel Dynamics warned that after earnings were $0.91 per diluted share in this year's first quarter, its Q2 2019 earnings are almost certain to fall -- to anywhere from $0.86 to $0.90 per share.
This was the exact opposite of what Wall Street had led investors to expect. Heading into the earnings warning, estimates quoted on Yahoo! Finance showed that most analysts following Steel Dynamics thought that while earnings would be down year over year, they'd at least be up sequentially -- to about $0.99 per share.
Instead, Steel Dynamics is saying that its business is deteriorating faster than expected, a fact it attributes to "lower profitability from the company's long product steel operations," "steel buying hesitancy" among its customers, and "inventory destocking."
Now what
Suffice it to say that this is disappointing news. And yet, as bad as the news is, Steel Dynamics' share price may be sufficiently cheap that it's overcoming buyers' hesitancy to own the stock.
Steel Dynamics stock currently costs only 5.4 times trailing earnings. And yes, it seems these earnings are deteriorating faster than expected. But even so, based on estimates, Steel Dynamics' forward P/E ratio is still only 8.6 -- hardly an expensive valuation for a stock in a cyclical industry, where prices are bound to go up eventually, and where management is paying shareholders a 3.8% dividend for them to wait patiently until things turn around.
At prices this cheap, I can't really blame investors for seeing the knife drop end over end -- and trying to catch it anyway.
