Despite market jitters over the high cost of steel, and the risk of a slowing economy in China, the past year has been a good one for steelmakers. U.S.Steel (NYSE:X) shares are up nearly twice the appreciation of the S&P 500, AK Steel (NYSE:AKS) and Posco (NYSE:PKX) are up roughly three times, and Nucor (NYSE:NUE), is up eight times the S&P's rise. Tomorrow, we'll get fiscal Q1 results from Canada's Novamerican Steel (NASDAQ:TONS), one of the few players in the steel manufacturing and distributing industry that has managed to underperform the index.
What analysts say:
- Buy, sell, or waffle? Only three analysts follow Novamerican, and even they seem uninterested. Each of them considers the stock no more than a hold.
- Revenues. Quarterly revenues are believed to have declined more than 3% versus last year's first quarter. This year's target is $199.4 million.
- Earnings. Profits are expected to come in 20% lower than they did one year ago. Analysts are looking for $0.78 per share.
What management says:
A look at last quarter's results may foreshadow what we'll see. In Q4, Novamerican titled its earnings report: "Strong Fourth Quarter Propels Novamerican Steel to Record Sales in 2005." That was true, to an extent -- but not the whole story. By weight, steel sales rose nearly 14% year over year, but by value, sales rose less than 2%. Gross margins collapsed and profits declined more than 40%.
In the wake of that, Novamerican predicted that there would be "steady" demand and "stabilized" prices in fiscal Q1 2006. Now, "steady" and "stable" both sound pretty good on the surface. But remember that they both mean "the same" -- as in "expect the same thing in fiscal Q1 2006 as you saw in fiscal Q4 2005."
What management does:
Unfortunately for shareholders, if Novamerican continues along the same path, this could yield some pretty unattractive margin numbers. For example:
|
Margins |
8/04 |
11/04 |
2/05 |
5/05 |
8/05 |
11/05 |
|---|---|---|---|---|---|---|
|
Gross |
22.2% |
24% |
22.9% |
20.3% |
17.2% |
15.3% |
|
Op. |
13.5% |
15.4% |
14.9% |
12.4% |
9.1% |
7.3% |
|
Net |
8.2% |
9.5% |
9.2% |
7.6% |
5.6% |
4.4% |
One Fool says:
I'm not a big fan of porcine cosmetology -- whether it's analysts applying the lipstick, or the company's own PR flacks. Any time a press release boasts of "record sales," you can be pretty sure the profits weren't worth mentioning.
Here's what I'd rather have seen Novamerican say -- and what shareholders should be thrilled to see, if something similar proves true tomorrow: Novamerican's profits declined 41% in Q4 and 49% for all of 2005. Meanwhile, the company generated $33.4 million in free cash flow for the quarter, and $64.2 million for the year -- increases of more than 500% and 600%, respectively -- as it sold down its inventories, converting them into cash.
Competitors:
In addition to the companies named above, Novamerican competes with:
- Gibraltar Industries (NASDAQ:ROCK) and
- Olympic Steel (NASDAQ:ZEUS)
Posco is a Motley Fool Income Investor recommendation. Looking to add stocks that pay dividends to your portfolio? Mathew Emmert offers two every month.
Fool contributor Rich Smith does not own shares of any company named above.
