Steel prices have spent most of this year falling back to Earth, and companies like SteelTechnologies (NASDAQ:STTX) have been dragged along for the ride. Where 2004 saw improving economic conditions and tight inventories lead to a sudden spike in prices, 2005 has produced softening economic growth and customers with expanding inventories.
As Steel Technologies pre-announced back in June, this was a weak quarter relative to recent results (though not bad at all on an historical basis). Sales were up a bit more than 10%, and net income was nearly cut in half -- both of which were roughly in line with the company's pre-announcement.
With cooling economic growth and higher customer inventories of steel, Steel Technologies shipped about 16% less steel this quarter than a year ago -- around 296,000 tons. Although the company's Mi-Tech Steel joint venture did reasonably well, with sales up 37%, it clearly wasn't enough to fight the overall trend.
Looking ahead, Steel Technologies management appears to expect ongoing price deterioration throughout the summer and into the fall. Once we hit the September/October period, management expects conditions to "normalize," though that's a highly subjective term. On a more positive note, American car makers' ongoing efforts to stimulate demand appear to be working. Should automakers continue to move more cars, Steel Technologies could see some improvement in that market's orders.
On the downside, most professional investors have washed their hands of the steel industry, wanting little or nothing to do with it. Price-to-earnings ratios (P/E) are quite low across the board, generally the hallmark of a cyclical business about to head lower.
Nonetheless, Steel Technologies has a pretty solid balance sheet. Debt isn't out of line, and management has made excellent progress with its inventory management. Since there should always be a need for Steel Technologies' intermediary services, a complete collapse isn't likely. The company's fortunes are tied to the steel industry, but working as a middleman between mills and customers does insulate them to some degree.
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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).
