What happened
Shares of steel mini-mill operator Steel Dynamics (STLD 1.09%) were running higher in afternoon trading on the Nasdaq Thursday, up 5.1% as of 2 p.m. ET.
There were a couple of apparent catalysts behind the move -- but to be honest, neither of them seems particularly worth getting excited over.
So what
Beginning with the macro view, steel prices are up by about 10% over the past month, according to data from Trading Economics. That's nice for steelmakers, of course -- but those prices are also down by about 2% over the past 10 days. So while the trend in steel prices is still higher, the ride has been choppy.
Separately, reports emerged Wednesday that Westpac Banking Corp., a large Australian financial institution, has increased its ownership stake in Steel Dynamics by 5.1%. That sounds significant, and indeed, it appeared to trigger a requirement for it to disclose the size of its stake under Securities and Exchange Commission rules -- which would explain why this purchase made the news.
That being said, Westpac's stake in Steel Dynamics still amounts to barely more than a nibble -- just 27,450 shares total, worth $2.3 million. Given Steel Dynamics' $15.5 billion market cap, that amounts to a fraction of a fraction of a percent of ownership, which doesn't seem significant to me.
Now what
So that's the macro view, and as I said, it's really not inspiring. But on a more granular level, I must admit that there is a lot to like about Steel Dynamics.
Take the second-quarter earnings report it delivered last month, for example. Steel Dynamics reported record sales of $6.2 billion and earnings of $1.2 billion. The $6.44 per share it earned was up 94% from a year ago on a 39% jump in revenue. Demand for steel is strong, and even though prices are high for the scrap steel that Steel Dynamics uses as raw material to make its new steel, the company is producing impressive profits -- enough so that the stock currently trades at just 3.6 times earnings.
You might be skeptical of a stock with a valuation that low, and you'd have reason to be. This period of high earnings might not last. However, analysts who follow Steel Dynamics see its earnings continuing to run hot into 2023. The company's forward price-to-earnings ratio is a similarly cheap 3.7. Management has assured investors that demand for steel remains "healthy across all of our businesses, conflicting with the more pessimistic emotion in the marketplace," and said that "steel fabrication operations order backlog remains at near-record volumes and forward pricing levels."
Even if steel prices do soften and Steel Dynamics' earnings end up not being as robust as forecast, if you ask me, a sub-4.0 price-to-earnings ratio on a stock with a dividend that currently yields a respectable 1.7% offers a pretty nice-sized margin of safety. Investors Thursday seem to think they've spotted a bargain in Steel Dynamics stock -- and I think they're right.