Metals recycler SchnitzerSteel (NASDAQ:SCHN) has been in a few scraps of its own lately, as higher input costs, volatile finished prices, shipping rates, and energy have all conspired to make business a bit more "interesting."
By the looks of the company's second fiscal quarter (ended February), though, it seems to be holding its own for the time being. Revenue climbed about 33%, and net income came close to doubling at $36 million -- despite the inclusion of nearly $8 million in additional environmental expenses.
Not surprisingly, the recycling business led the way -- almost tripling operating income on the back of a 39% increase in revenue. While volume dropped about 5% from a year ago, robust pricing (up about 52% annually) more than compensated. Elsewhere, the company's joint ventures, auto parts business, and steel manufacturing operations all did well in their own right.
Looking ahead, though, Schnitzer sees the short-term growth outlook getting a bit rockier. In fact, the company is expecting operating income for the next quarter to come in between $46 million and $53 million -- below this quarter's level and below the year-ago figure of $67.3 million.
The main culprits won't come as any major shock. To start with, the company is seeing higher prices for unprocessed metal, the basic ingredient for its recycling business. Additionally, while management thinks freight shipping costs should begin to stabilize, they will be stabilizing at levels that are meaningfully higher than year-ago levels. Finally, end-user pricing looks to be slightly lower in the coming months.
While all that sounds like bad news, there is another aspect to the story to consider. Bull (and bear) markets don't move in straight lines -- there are always periods of retrenchment and reversal. To that point, steel production looks to be strong for at least the next few years (a lot of that coming in China), and those steel mills will need resources such as scrap metal.
With iron prices moving higher (as I mentioned in this earlier piece on CVRD (NYSE:RIO)), many operators are increasing their usage of scrap metal. For just one example, consider Japan -- generally an exporter of scrap. Many Japanese mills are contemplating using more scrap metal, and even a small shift in behavior could lead to meaningful changes in the market for scrap metal.
Schnitzer management does a good job of keeping shareholders informed, and investors can learn a thing or two by following the press releases. While it might not be as glamorous (an odd distinction to make about any steel company) as POSCO (NYSE:PKX), U.S. Steel (NYSE:X), or Nucor (NYSE:NUE), it lives in an interesting neighborhood of the industry. Fools with an interest in the steel market should continue to keep an eye on Schnitzer.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
