The stock market never lets you relax. No matter how good things may be, Wall Street always moves its eye to the future. While a host of steel companies have posted phenomenal (and in many cases record-setting) earnings, rumblings are starting to mount that the bloom is off the steel rose.
While sales were up 115% percent to $600 million and net income was up almost five times to $82 million, those results were actually below expectations. The company posted earnings per share of $1.47 -- below the Wall Street mean of $1.59.
Earnings were hurt by the combination of lower shipments in the fourth quarter, higher energy prices, and higher prices for the scrap metal that Steel Dynamics uses to manufacture steel. Like Nucor
Forward guidance wasn't exactly reassuring either. Although the company expects scrap prices to ease and sees finished pricing staying firm, its EPS guidance for the first quarter of 2005 is below Wall Street expectations and roughly flat with the December quarter. While management believes that it can ship as much as 10% more steel for 2005, and is cautiously optimistic that Steel Dynamics can post year-over-year EPS growth, investors are understandably skittish about any signs that the steel market has peaked and is about to head down.
It's tough to say for sure what will happen with steel in 2005, other than to say prices will eventually drop as more capacity comes on line. China is a big unknown, and although Steel Dynamics management believes that the Chinese situation is a topic that has been "over-written and over-worried" about, there's no doubt that Chinese demand has a major role to play in demand and pricing.
At present, the market is pricing Steel Dynamics as though steel is at a cyclical peak. While investors who concur that steel growth has maxed out should probably avoid these shares, those looking for continued strength in metals demand and pricing might want to look at this highly efficient little steelmaker.
Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.