Sometimes you have to look past your circle of familiar faces to find good values. This might be the case for me with Chaparral Steel
For its fiscal third quarter, the company reported that revenue rose nearly 45% as pricing ticked up slightly and shipments jumped 43% from last year. At the same time, scrap costs were more stable and energy prices dropped quite a bit from the second quarter. More through-put and OK costs? That spells potential operating margin improvement, and the company certainly delivered -- to the tune of 140% growth in operating income.
There are at least a few things that seem to be going in Chaparral's favor right now. First, the company is a major maker of structural and special bar quality (SBQ) steel, and it's benefiting from a reviving market for non-residential construction. What's more, the company has relatively new machinery and so has lower ongoing capital investment needs for the near future. Last but not least, Chaparral continues to develop new higher-margin products like PZ Piling -- to better stand out from the herd.
Now, it's not all automatically smooth sailing. The company is still vulnerable to scrap prices and energy costs, and I personally happen to think that natural gas is more likely to move higher rather than lower. It's also true that there's some economic and international sensitivity here -- a downturn in the economy would be bad news for construction, as would increased low-cost imports.
The thing is, even when I factor those issues into my valuation, I come away pretty impressed with this stock. I'm biased through long association into thinking that Steel Dynamics and Nucor might be better companies, but Chaparral looks really interesting right now. While I'm not really in the market for any more steel to reinforce my portfolio, other investors who have yet to explore the steel sector might want to take a good long look at this spinoff from TexasIndustries
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).