Fellow Foolish contributor Rich Duprey called The End of the Steel Boom, and Canadian steel-produced Novamerican (NASDAQ:TONS) delivered the proof. Third-quarter revenue fell a modest 5.2%, but net income fell an eye-popping 80.3%.
Is it time to forget the steel industry for this business cycle?
Read the Novamerican earnings press release, and you'd come away thinking the outlook is downright rosy. The company says the decline in steel prices, which actually started at the end of 2004, bottomed out in July when industry inventories were "finally reduced to unsustainably low levels." The silver lining in the latest quarter's cloud was this: Although June was weak, business activity improved in July and strengthened in August.
Read the earnings warnings from competitors U.S. Steel (NYSE:X), AK Steel (NYSE:AKS), and Steel Technologies (NASDAQ:STTX), however, and you'd come away thinking the current quarter was weak but that the industry is seeing an uptick in prices and shipments.
So is a combination of inventory replenishment, rising steel prices, and steady demand a reason to look for a value play in steel stocks? Not really.
Energy prices are a key component in steelmaking. High prices in North America, especially for natural gas, will certainly temper the earnings rebound this time. For example, natural gas bottomed at $5.85 per million BTUs in mid-February and climbed steadily to reach $14.55 last week. If demand doesn't strengthen significantly, that kind of pricing pressure might create a pricing and profit advantage for foreign competitors.
Novamerican's stock was trading for $20.75 almost a year ago. Since then, it has reached $90.27 in February, only to swan dive back to less than $35 last week. Toward market close, the stock is up 3% to $38.36 a share.
At current prices, gone are the stock's previous single-digit earnings multiple. At 13.4 times projected 2005 earnings, this cyclical stock is hardly a value play in my opinion. Also consider the fact that Chinese exports are expanding (creating increases in supply/capacity) and the U.S. economic expansion has hit what I'd think of as a few bumps. In light of this, I can't see this stock being something I'd really want to dabble in.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
