These aren't the best of times to be a middleman in the steel sector. Though Steel Technologies (NASDAQ:STTX) is one of the largest North American processors of flat-rolled steel, it finds itself in a tough spot. On one hand, steel suppliers like U.S. Steel (NYSE:X) and Nucor (NYSE:NUE) are enjoying a pretty solid pricing environment. On the other, Steel Technologies is seeing some lag in passing those prices on to customers.
As you might imagine, that's a tough environment in which to prosper, and Steel Technologies isn't exactly prospering. Revenue was down 13% this quarter, and gross margins were cut in half. Given that the company wasn't able to cut operating expenses in tune with the gross profit drop, operating income dropped considerably.
If you're looking for good news, I suppose you could point to the 20% sequential increase in volume and flat sequential pricing. Even though the company is getting temporarily killed on its margins, it's not seeing business volumes drop off.
And whether you think it foolish or determined, management is certainly not backing away from the auto business. About half of this company's revenue comes from the auto sector, and the company recently reached an agreement to buy the nation's largest supplier of auto blanks. Maybe the domestic auto business isn't doomed long term, but don't expect a big increase in business soon, based on automakers' unit production guidance.
Eventually, the company's margins should improve again. In addition, its balance sheet is in good shape, and I'd be remiss not to mention the ample opportunities remaining for consolidation in the steel-processing industry. That said, I'm just not overwhelmingly comfortable today with a company stuck between a supplying industry that's finally starting to act more like a rational oligopoly, and customers dependent on big-ticket consumer expenditure.
For more Foolish thoughts on the metal markets:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
