Please ensure Javascript is enabled for purposes of website accessibility

Strong Cash Flows Allow Steel Dynamics to Continue Expanding

By Howard Smith - Updated Oct 21, 2019 at 2:23PM

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

The company's new Southwest greenfield steel mill investment will grow steelmaking capacity by 25%.

When investors think about buying shares in a steel company, the first thing to acknowledge is the cyclical nature of the business, and accordingly, how the stocks themselves will reflect those cycles.

But once a decision is made to invest in the sector, businesses with long-term growth prospects and low-cost production should be at the top of your list. Steel Dynamics (STLD -1.25%) is one of those businesses.

Molten steel being poured in a factory

Image source: Getty Images

The business of the steel business

Steelmaking, processing, and finishing is a capital intensive business with high fixed costs. Two top steelmakers in the U.S. have recently announced greenfield expansion plans. Steel Dynamics is planning a new sheet mill in Texas for an investment estimated at $1.9 billion, while Nucor (NUE -0.71%) has announced a new plate mill in Kentucky, estimating that investment at $1.35 billion.

Operating steel mills is costly as well. Input materials such as scrap, iron ore, or other types of iron units -- plus the massive amount of energy required to make steel -- make the low-cost producers such as Steel Dynamics and Nucor best able to produce cash flow for continued growth. The chart below compares the trailing 12-month cash from operations this year for the leading U.S. producers.

STLD Cash from Operations (TTM) Chart

Data by YCharts.

Expansion continues

With steel prices falling this year, results for the producers have also been following suit. For example, third-quarter revenue for Steel Dynamics decreased 22% year over year, while operating income fell 57%. However, investors must keep in mind that 2018 was a record year for steel makers. Commenting on this year's performance, CFO Theresa Wagler stated back in July: 

To take this moment to level set, our financial results are quite strong. They're just lower relative to our record high 2018 results. And as we discuss our business this morning, you'll find we are constructive concerning underlying steel demand and optimistic concerning our unique earnings catalyst.

The optimism regarding future earnings catalysts comes from the expanding operations at the company. Strong continued cash flows allow management to pursue growth plans.

For example, Steel Dynamics continues to ramp up production at its Heartland flat-rolled facility, which it acquired in June 2018. Also in 2018, the company completed its acquisition of a previously closed rolling mill from Kentucky Electric Steel, which adds a new internal customer to allow more production from the upstream steel mill assets. In March 2019, it acquired a 75% interest in United Steel Supply, which gives it an expanded supply chain for its value-added painted Galvalume sheet products. It also recently completed expansions at both its Roanoke Bar and Structural and Rail divisions.

What comes next

Big future plans include a new galvanizing line at the Columbus, MS facility as well as the previously mentioned greenfield Texas plant. The new galvanizing line in Columbus will begin production in 2020 and be the third at the facility, bringing the total for the company to ten galvanizing lines located throughout the eastern half of the United States.

The massive new investment in Texas will have "Next Generation" steel-making capabilities. It will include downstream galvanizing and paint line operations, serving a new market for the company as it eyes business to the west and south. Steel Dynamics estimates that 30% of the production will be sent to Mexico, where management estimates flat roll steel consumption has increased by about 40% from 2013 to 2018. 

A focus of the newest technologies will be the high-strength market for automotive and energy customers, with capabilities out to 84 inches wide, which will make it the worlds largest thin slab facility. This will increase steel-making capacity for Steel Dynamics by 25%. CEO Mark Millett said in the third quarter earnings release, "This facility is designed to have product size and quality capabilities beyond that of existing electric-arc-furnace flat roll steel producers, competing even more effectively with the integrated steel model and foreign competition."

Whether to invest

For investors, of course, all of this expansion only matters if it turns into growing profits for the company. Being such a cyclical industry, the focus should be on whether a steel company's growth brings higher earnings highs as well as higher lows, throughout the business cycle. Steel Dynamics, along with Nucor, has the cost structure and company culture that has resulted in many successful projects.

Keep an eye on both company's expansion projects as they come online to see whether returns grow relative to their position in the business cycle. If that comes to pass, investing in the growing steel companies should result in long-term returns for that portion of your portfolio.

Howard Smith owns shares of Nucor. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.

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

Steel Dynamics, Inc. Stock Quote
Steel Dynamics, Inc.
$83.55 (-1.25%) $-1.06
Nucor Corporation Stock Quote
Nucor Corporation
$141.87 (-0.71%) $-1.02

*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 08/16/2022.

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.