The semi-famous line from TheA-Team, "I love it when a plan comes together," is still among my favorite quotations, and SteelDynamics (NASDAQ:STLD) provided another good example of its wisdom. While this mini-mill certainly isn't on everybody's lips when the talking heads talk steel, I believe that the management team here has more than rewarded investor confidence.
The first quarter was supposed to be pretty good, but wound up excellent. Steel Dynamics' revenue rose 17% from the year-ago period, and both shipments and pricing showed improvement from the fourth quarter. With these companies, more throughput generally means better margins, and here, Steel Dynamics' operating income was up more than 23%.
Of course, there are still some jitters in the background of this rather hot market for steel stocks. Some folks are still worried about import competition, though it has yet to materialize. Likewise, there are vague concerns about economic slowdown. Last and not least, there is the matter of scrap cost -- a major factor for mini-mill operators like Steel Dynamics and Nucor (NYSE:NUE). While it's true that prices of scrap have been volatile, predicting future prices is almost folly: If the steelmakers themselves are often surprised by the moves in the scrap market, I'm not sure you or I have a great chance of predicting them ourselves.
All things considered, this is a pretty respectable market for steel now, but I think Steel Dynamics might be in an even better position. Not only is the non-residential construction market just getting under way, but the company continues to position itself more toward value-added steel products (which tend to have better pricing). In addition, the company is still working on getting itself into the game of providing steel rail for the Class 1 railroads. Given that operators like Burlington Northern (NYSE:BNI) and CSX (NYSE:CSX) have a lot of rails to care for, that could mean a nice little chunk of business for this company.
My only hitch in this is basically two sides of a similar coin. Analysts seem to be getting a little comfortable with higher growth expectations, and momentum investors seem to have taken a shine to the steel sector. None of that's bad for today's owners, and I don't see the stock as overvalued. But the increased enthusiasm may introduce a little more potential for volatility, and none of us really needs that.
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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).
