What happened
Shares of metals producer Algoma Steel (ASTL +1.10%) slipped 4.4% in Tuesday afternoon trading as of 1:20 p.m. ET, after missing on both the top and bottom lines in its second-quarter 2023 earnings announcement.
Heading into earnings, analysts had forecast Algoma would earn $0.46 per share on quarterly sales of $642.9 million. As it turned out, sales were only $599.2 million and profits fell a dime short of expectations at $0.36 per share.
NASDAQ: ASTL
Key Data Points
So what
Q2 marked quite a turnaround in Algoma's fortunes compared to last year, and not in a good way. Sales declined roughly 40% year over year, and Algoma's profits -- $4.02 per share a year ago -- shriveled 91%.
Lower steel demand was part of the problem, as Algoma shipped 26% less product in Q2 2022 than it did in the previous year's second quarter. Pricing was another problem, down about 21% per ton of steel shipped.
Finally, management also blamed "transitory events ... related to temporary workforce availability" that prevented its facilities from operating at full capacity, costing the company as much as $130 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- of which only about 60% have been booked so far. (The balance, about $52 million worth of profits foregone, will affect Algoma's Q3 results.)
Now what
Speaking of Q3, management didn't actually speak much about Q3 and what investors can expect in the next quarter, currently underway. But the news probably won't be great.
After enjoying roughly 18 months of solid earnings and strong free cash flow, Algoma ran into a ditch in Q2, with earnings sagging and free cash flow turning negative -- about $110 million in cash burned in the quarter. So while it might seem hard to argue with Algoma's valuation right now, which looks very attractive at just 1.1 times trailing profits, it's likely the immediate future won't be as bright as Algoma's recent past.
I'd be very cautious about investing in this one, folks. Because if the trend that reversed in Q2 continues to deteriorate going forward (and a $52 million charge to earnings next quarter certainly isn't going to help with that), Algoma Steel stock could rapidly turn from a no-brainer bargain to a value trap.
