Steel Dynamics (STLD -1.09%) was co-founded by CEO Mark Millett, who just so happened to work for Nucor, which is easily one of the best-run steel mills on Earth. So it's not particularly surprising that Steel Dynamics is operating with a strong playbook. And 2021 proved just how strong. Here's a quick look at the numbers to back that statement up -- and another couple that help explain why you might want to put this stock on your wishlist, but probably not your buy list.
The U.S. economy was hit hard in 2020 by the government-mandated shutdowns, social distancing, and work-from-home trends that took shape thanks to the pandemic and the world's response to it. That said, 2021 proved to be a huge bounce-back year, with economic growth quickly recovering from the hit it took. And Steel Dynamics was there to benefit by supplying customers -- notably in the construction, auto, and industrial sectors -- with an increasing amount of steel at, conveniently, higher prices. The average selling price last year was up nearly 80% over 2020 levels.
But the average selling price wasn't the only big number. For example, Steel Dynamics produced a record 11.2 million tons of steel for the year. That was up from 10.7 million tons in 2020, which itself was close to a record level. While demand was a key piece of the story here, investors shouldn't ignore the fact that Steel Dynamics has been expanding its business through ground-up construction and acquisitions. Given its modest size ($12 billion market cap) compared to Nucor ($32 billion market cap), it's probably the better option for growth-oriented investors.
So more steel at notably higher prices. Which brings the story to the next couple of records. Steel Dynamics had record sales in 2021, hitting $18.4 billion, up from $9.6 billion in the prior year, a nearly 100% improvement. Operating income was also at record levels, hitting $4.3 billion, with net income reaching a record $3.2 billion. Those numbers were $847 million and $551 million, respectively, in 2020. There was clearly leverage in the company's business model, with a significant amount of the benefit from higher demand and pricing flowing through to the bottom line. That strength was seen throughout the business, with management reporting "record steel, steel fabrication, and metals recycling segment earnings."
In addition to all these records, Steel Dynamics also posted record cash flow from operations of $2.2 billion and record adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). When the dust settled, 2021 turned out to be a high-water mark for Steel Dynamics across a vast array of important measures.
Not today, thanks ...
The problem with all of this is that Wall Street is well aware of the company's success. The stock is up more than 50% over the past year and around 240% since its pandemic low in mid-March 2020. That compares to gains on the S&P 500 Index of about 12% over the past 12 months and a bit more than 80% since Steel Dynamic's mid-March low in 2020. A lot of good news has been priced in here.
The dividend yield is a miserly 1.6%. Although that's higher than the S&P 500's 1.3% yield, it is historically low for Steel Dynamics. That's a further warning that now is not the time for long-term investors to jump aboard here, even though the company has a 12-year streak of annual dividend increases under its belt, putting it soundly in the Dividend Achiever space.
The big problem is that the steel industry is prone to dramatic ups and downs. It is highly cyclical, leading to impressive peaks at times, but also deep valleys -- which is why most investors will be better off watching Steel Dynamics and its impressive current performance from the sidelines. When the economic cycle eventually turns, at which point the United States will most likely be in a recession, it will be time to remember just how well this mill can perform in good times. And, perhaps holding your nose, you should jump aboard when everyone else hates the stock.
Be impressed enough to wait
Individual investors don't have to make sure they own the best-performing stocks at any given time, allowing them to be patient and wait. Asset managers don't have the same leeway, with some buying stocks just to have them in the portfolio for "window dressing." Steel Dynamics is a very well-run steel company, but it's just too expensive today because, well, it's breaking so many performance records. That won't last forever. If you prepare yourself now, putting it on a wishlist, you will be ready to act when better pricing comes along, which history suggests will happen sooner or later.