Editor's note: The original version of this article contained an error stating that Metal Management had been profitable for the last 10 years. The story has now been updated with the correct information. We apologize for this mistake.
There's more than one way to make steel. While steel making generally evokes images of belching blast furnaces turning coke and ore into fresh new ingots and rolls, that's not the only way. Metals are highly recyclable, and turning used-up scrap metal into fresh new product is both economically friendly and often quite profitable.
Sales for its fiscal third quarter grew 73.7% to just under $448 million on a 6% increase in scrap tonnage sold. As the company's operating leverage magnifies the impact of sales, net income grew at an even faster rate -- up more than 134% to 29.5 million. For the past 12 months, the company has generated about $38 million in free cash flow and has paid down more than $30 million in long-term debt.
As a commodity company dependent on other commodity companies, Metal Management survives and thrives through efficient management. Gross margins grew by about 2% from last December, and operating margins nearly doubled. It must be noted, though, that both of those figures are down sequentially as lower pricing hurt profitability. Business was also hurt by what management referred to as an "atrocious" freight situation at year-end that left the company unable to ship as much scrap as it intended.
Looking ahead, it's anybody's guess as to what will happen with steel prices. Though Metal Management does a remarkable job of buying, processing, and selling scrap as effectively as possible, sound management can only do so much in the face of powerful industry dynamics. If demand for finished steel declines, it will be only a matter of time before customers such as Nucor scrap their scrap orders from Metal Management.
Investors concerned about the near-term outlook for steel can take some solace, though, in management's stated commitment that if they cannot generate a sufficient return on capital, they will return that capital to the shareholders.
While nobody knows what the future may hold for steel prices, investors who want some commodity exposure in their portfolio would do well to take a look at this scrappy little company and its shareholder-oriented management team.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.