Every superhero has a hidden weakness. For Superman, the Man of Steel, it was power-sapping kryptonite. For Steel Dynamics (Nasdaq: STLD), it's an increased debt load that could weigh down its future earnings power like lead.
Steel Dynamics recently released first-quarter earnings guidance that was lower than Wall Street had expected. Shortly after this, the company followed up with an announcement that it accessed credit markets to the tune of $350 million, $50 million more than originally planned. Currently the stock is only down about 4% so far this year, but it has been a wild ride for shareholders getting there, who rightfully may be nervous about the near-term outlook for the steel company. Alas, the situation is not as bad as it may appear.
Although Steel Dynamics' earnings guidance is lower than the almighty "Street" forecasted, shareholders should take solace in the fact that the company has returned to profitability. The first six months of 2009 proved to be abysmal, as earnings were well in the red because of the recession. Thanks to the downturn, havoc was wreaked on sale volumes and steel prices, with revenue declining 62% compared to the first six months of 2008.
This result was not atypical of steel manufacturers in the United States last year. Competitors like Nucor (NYSE: NUE), U.S. Steel (NYSE: X), and AK Steel (NYSE: AKS) all had years in 2009 that would make the Man of Steel grimace. However, for the last two quarters of 2009, Steel Dynamics was profitable and its guidance suggests that the first quarter of 2010 will be solid as well. As the economy has improved, sales volumes and steel prices have increased enough to put the company back on solid financial ground.
Steel Dynamics' recovery has come at a cost, however. As mentioned above, the company recently issued $350 million in debt. Last year, it also cut its dividend payments by 25%, and raised capital to the tune of $287.5 million in convertible debt and $391.3 million in a common stock offering to pay off expiring debt and maintain an adequate cash reserve. Although its current debt levels are not a threat to its long-term solvency, it likely means that the company's cash flow will be tied up in paying off its creditors for the next few years. Therefore, shareholders shouldn't expect a substantial increase in dividend payments or stock buybacks anytime soon.
From all appearances, Steel Dynamics has come out relatively unscathed from one of the worst recessions in U.S. history, and has returned to its previous track record of success. A continued market rally and further steel price recovery could send shares higher, but the company's debt will probably prohibit it from returning cash to its investors for the foreseeable future. With that in mind, there may be better names in the industry for your investment dollars.
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