The second quarter wasn't a kind one for steel companies, and Steel Dynamics
To hear management tell it, the company's market virtually fell apart in June, with new order entries just disappearing. Selling prices continued to slide as a result. While the company did manage to ship about 1% more steel than a year ago (and 5% more than a quarter ago), pricing dropped by about 9%. The weakest part of the business was clearly in flat-rolled steel, with a 6% drop in shipments.
Structural and rail set shipments, meanwhile, set a new record in June, and the company shipped about 20% more bar product during the quarter on a sequential comparison. With apparent emerging strength in non-residential construction, the company's backlog for structural steel ended the quarter at a record.
I know it's become chic to bash the metals sector, but I'm not going to do that with Steel Dynamics. First of all, even with a bad second quarter, this company is still among the most profitable domestic steel producers. What's more, the company is more highly leveraged toward specialty products like rails and bars, where the market is a bit more sanguine. To me, that suggests that Steel Dynamics remains well-positioned to compete with rivals both here and abroad.
Furthermore, I do believe that the commercial construction and transportation markets are reviving. Many types of companies related to construction (for example, those providing equipment, engineers, suppliers, and the like) are reporting improving business trends and growing backlogs. On the transportation side, sooner or later there has to be more spending on roads and railroads -- unless we're going to give up our cars and trains and swap them for donkey carts. With a lot of Steel Dynamics' business potentially going into those sectors, I see that as a positive.
I must say, though, that management made a bizarre comment regarding the company's stock price. Company executives seemed to suggest that they were holding off on further share repurchases because the market was valuing the stock so cheaply. Now, I'm no CEO, but I would think the best time to buy stock is precisely when the stock looks too cheap. After all, launching a share buyback when a stock is overvalued is little more than a waste of money.
In any case, this is a stock that I want to watch closely. A profitable company leveraged to markets that are set to grow appeals to me, and I think analysts and professional investors may have gotten ahead of themselves in dumping on this stock. This isn't a great stock for the risk-averse or impatient, but so long as you think the company can grow at 10% a year or more, it does look interesting.
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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).
