During the second quarter's conference call, Steel Technologies (NASDAQ:STTX) management warned that volumes, pricing, and margins would all be softer in the third quarter. Boy howdy, was that right: Business conditions worsened so much that the company had to come out on Thursday morning and drop its quarterly guidance by half.
Investors haven't had much love for steel lately, and the stock took a smacking in early trading, heading down 16%. While this has created a new 52-week low, the good news (such as it is) is that the stock is at least still above its pre-boom levels.
According to a rather brief press release, the company's shipments have slowed more than expected. Management is now expecting (or is that hoping?) to ship about 300,000 tons for the third quarter -- about 8% less than in the second quarter. Pricing has also apparently dropped off, and margins for the quarter have suffered.
As a result, Steel Technologies management is now looking for sales of $260 million and EPS of $0.42. That compares with prior median analyst estimates of $267 million and $0.84 per share. While it should be noted that relatively few analysts follow this company, that's still a major miss all the same.
Bad news has become rather commonplace of late in the steel sector, but this announcement may be a little worse than most. Steel Technologies doesn't make steel but rather functions as an intermediary -- taking rolled steel from the likes of U.S. Steel (NYSE:X) or Nucor (NYSE:NUE) and cutting, shaping, and otherwise processing it for use by customers in industries like automobiles, railcars, furniture, construction, and the like.
As such, Steel Technologies usually benefits from being a value-added service provider. If steel prices go up, it passes on the costs, and if steel prices go down, it sees lower costs for itself. But if shipments and margins are being pressured, one can wonder what that says about the health of the end users.
Whether this marks a quarter when customers worked off inventory gluts or went with suppliers that were more desperate to cut prices and keep business, I don't know. But I do know that companies that slash their earnings guidance so dramatically usually need a little bit of time to pick themselves up off the mat.
Given the uncertainties at all levels of the steel market, Fools might do well to stand aside, ignore the seemingly low price-to-earnings ratios, and look for better opportunities elsewhere.
For more on the troubles in the metals markets:
- Commercial Metals Gets Hammered
- Has China Caused a Metal Meltdown?
- The Coming Crash
- Is the End Nigh for Steelmakers?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
