With steel prices soaring and oil companies like ChevronTexaco
The good news: After the market closed Friday, Lone Star announced that it expects to earn up to $0.95 a share in the third quarter, a significant improvement over its $0.60-a-share loss last year in the same quarter.
The bad news: Earnings were $1.11 in the firm's second quarter, and analysts were expecting $1.35 this quarter.
A reason to be optimistic: A 20% increase in steel prices hurt earnings this quarter. Stop the presses: There's a steel company that does not benefit from higher prices?
Blame it on the bean counters. Lone Star accounts for inventory using the LIFO method (last in, first out). If the company had used FIFO (first in, first out), earnings would have been $0.85 a share higher. So the inventory, based on current prices, is understated. Let's call it a hidden asset for now.
A reason to be pessimistic: Manufacturing costs are increasing, and one reason is lower yields -- and you will have to wait for the details on this until October 15, when earnings are reported.
So, what's up?: This stock trades at a low eight times 2004 and 2005 earnings estimates. The stock is up 175% over the last 52 weeks because Lone Star's earnings are improving sharply from big losses in 2002 and 2003. The company has positive free cash flow, and its 0.52 debt-to-equity ratio is not out of sight.
What's hurting the stock today are two brokerage downgrades, and competitors Maverick Tube
Long-term, the world steel market remains challenging, and it is unclear how Lone Star's margins could improve more, so analysts project flat 2005 earnings. Inventories may be a hidden asset, and the oil drilling markets should remain robust, but you don't invest at market peaks -- and that's exactly where the steel market is.
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Fool contributor W.D. Crotty owns stock in ChevronTexaco, but none of the other companies mentioned.