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Salvaging Growth at Schnitzer

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 1:28PM

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The company is in a tough commodity business, but sound management could still mean above-average opportunity.

No matter how much investors may wish it were possible, even the best managers of commodity companies can't exercise much influence on the cyclical ups and downs of price and demand. The best you can generally hope for, realistically, are skilled and honest managers who do the best with what they have. I'm not necessarily prepared to deem SchnitzerSteel's (NASDAQ:SCHN) team as the best in the business, but thus far it's been pretty straightforward about the shape of the business.

As expected, the company's fiscal fourth quarter couldn't live up to year-ago levels. Revenue was down about 4%, and operating income fell more than 6% as operating margins fell slightly. Taxes were a little higher in this period, and the company's net income fell 9% from last year's level.

In the recycling business, operating income was slightly higher because a single-digit increase in average realized price per ton helped to compensate for a 15% decline in volume that was generally a product of lower inventory levels. Turning to the auto business, revenue was up strongly, but operating income fell as the company worked through higher cost inventory.

Lastly, this was a tough quarter for the steel manufacturing business. Operating profits fell 26% as the company saw about 4% lower finished steel prices but higher scrap costs. Shipments were up 5%, though, because demand remained relatively firm. Although the company expects some decline in sales volume and some higher input prices, the steel unit has pushed through two separate price increases for rebar in the past two months.

Management was actually fairly optimistic about the coming year. Pricing looks OK, and the auto business continues to be an opportunity with real growth potential. While management doesn't believe that 2006 will be a "great" year, it seems guardedly optimistic that it will still be a good year. Investors would do well to remember, however, that we're still talking about a commodity business and that long-term equity appreciation from commodity companies has proven difficult in the past.

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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).

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Stocks Mentioned

Schnitzer Steel Industries, Inc. Stock Quote
Schnitzer Steel Industries, Inc.
SCHN
$28.77 (-5.86%) $-1.79

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