Created as the result of a spinoff earlier this year, Chaparral Steel (NASDAQ:CHAP), reported a 62% jump in earnings on an equally impressive 40% increase in revenues. The nation's second-largest structural steel beam producer said demand remained strong in non-residential building activity and forecast a strong earnings report again next quarter, though with higher energy and raw-material costs, margins might be tighter.
Chaparral was spun off from cement and aggregate company Texas Industries (NYSE:TXI) in June of this year and has been turning in impressive results ever since. It's a marked turnaround for the industry from just a few years ago, when office vacancy rates soared and demand for structural steel products stagnated as a result of massive office overbuilding in the late 1990s. Capacity utilization had plummeted below 75% in 2001 and had stayed there for several years, but according to the Federal Reserve, it has climbed back above 80% this year.
That's a key number for steel producers because it indicates growing demand for office space. With growing demand, a need for new buildings emerges. Competitor Steel Dynamics (NASDAQ:STLD) also saw solid growth in its structural steel division when it reported results back in October, even as the rest of its markets were soft. The top structural steel producer, Nucor (NYSE:NUE), has also seen demand pick up from earlier this year, when there was an oversupply because of imports. Foreign steel producers are still shipping plenty of product, but Chaparral noted that average selling prices were down only 1% from past year.
The company pointed out that it ended the quarter with $113 million in cash, while owner earnings for the six-month period increased to $68 million. It recently completed a $300 million exchange offer for senior notes and would use the proceeds from the offering to pay a special cash dividend of $341 million to Texas Industries.
Shipments for the quarter were up 41% year over year to 548,000 tons but fell 9% sequentially from the first quarter. The company expects demand to continue to soften going forward, and margins will be less than they were because of higher energy costs, which climbed by 25% over the first quarter. The winter months won't be any better.
The stock surged more than 13% on the news and has now risen about 50% since the company was spun off. It's important to note that steel, like many such sectors, is cyclical, and the time to buy is when the industry is in the doldrums, as it was at its nadir in 2003. Not that there isn't more money to be made, particularly since demand is still picking up. But 2005 was a significant year for steel producers, and many saw their shares dramatically increase. When the pendulum swings, it's dangerous to be caught holding those shares, and with Chaparral not paying investors a dividend as do many of its competitors, those shares might be cold comfort -- kind of like one of its steel girders.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
