It's time for another entry in the "is the steel boom over?" angst-o-rama here at The Motley Fool. Today's contestant is Steel Technologies
Sales for the fiscal second quarter climbed 55% to $287 million, and operating income more than doubled to $23.8 million. On a net basis, the company saw even greater growth as net income came in at $15.4 million versus $6.9 million a year ago. Investors should note, though, that shares outstanding were up more than 30% because of a secondary offering conducted back in March 2004.
Guidance for the next quarter is the sticky part. While the company expects tonnage shipped to be flat with the just-completed quarter (which was down about 2.5% from the first quarter), management thinks that softening demand will drive a 5% sequential drop in average selling prices.
As Steel Technologies sells so much product into the automotive sector, it's not a major surprise to see some softness in business. After all, none of the domestic automakers are reporting that their business is going gangbusters these days. What's more, this fits in comfortably with Posco's
Assuming that the company can manage its inventory effectively and keep tight controls on costs, the sequential decline will be painful but not terrible. What's more, it's at least theoretically possible that this is just a pause before the market firms up again. Still, it's very tempting to say that Steel Technologies has probably seen the best of this cycle for the time being.
Steel Technologies is a good lesson for those investors who are tempted to use screens and other automated methods to dominate their stock selection process. After all, the company's P/E looks extremely low on a trailing and forward basis. Of course, if growth begins to slip away, that P/E isn't going to mean much because investors will avoid the sector as they see analysts revising their numbers lower.
While there are still some sectors related to the steel space that look interesting (iron ore and metallurgical coal are still hot), the market has largely soured of late on steel. And to some extent, that's the way it should be -- the stock market is a discounting mechanism, and many investors are looking ahead at declining steel prices and taking down the stocks accordingly. Perhaps this is just the pause that refreshes before another bull cycle, but investors looking to commit new money to the sector had better have a good reason for thinking prices are going up when a lot of companies are seeing global prices flattening or easing.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).