Tic-tac-toe, investors want to know: Will scrap steel tsar Schnitzer (NASDAQ:SCHN) make it three-in-a-row for earnings misses when it reports its fiscal Q3 2006 numbers Monday morning?

What analysts say:

  • Buy, sell, or waffle? Only three analysts follow Schnitzer, but each of them rates the stock a buy.
  • Revenues. They expect the company to more than double its quarterly sales in Monday's news, to $460.2 million.
  • Earnings. Even so, profits are expected to fall 11% to $0.96 per share.

What management says:
In its last quarterly earnings report, Schnitzer cautioned investors to expect weaker year-over-year margins in two of its three businesses. However, it saw potential for improved margins in its core metals-recycling business, which accounts for two-thirds of Schnitzer's total sales and more than half of its operating profits.

What management does:
If Schnitzer's predictions prove accurate, it seems likely that:

  1. Analysts are correct in expecting weaker profits on Monday than one year ago, and
  2. The downward trend we've been seeing in Schnitzer's margins will continue.

Over the last 18 months, rolling gross margins are down by nearly 20%, operating profitability has been slashed by more than half, and net margins have also waned.

Margins %

11/04

2/05

5/05

8/05

11/05

2/06

Gross

25.3

28.0

27.7

27.6

22.8

20.3

Op.

28.5

30.5

27.8

27.9

17.7

13.4

Net

18.7

19.6

17.8

17.2

13.9

10.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The strong world economy brings two trends that have respectively been a boon and bane for Schnitzer. On the boon side, steel is in demand, and its pricing remains strong. On the bane side, steel is in demand, which drives up the costs of all of its forms -- pre-steel iron ore, scrap steel that Schnitzer transforms into "the good stuff," and the auto parts that are the bread and butter of the firm's successful Pick-N-Pull business.

In order for Schnitzer to get its margins growing again, therefore, it seems we'll need to see the impossible happen: Economies must remain strong enough to keep sales rising, but not so strong that they keep increasing raw materials prices in their wake.

Competitors:

  • Commercial Metals (NYSE:CMC)
  • Gerdau Ameristeel (NYSE:GNA)
  • LKQ Corp (NASDAQ:LKQX)
  • Metal Management (NASDAQ:MTLM)
  • Nucor (NYSE:NUE)
  • Oregon Steel (NYSE:OS)

Need more details on Schnitzer's recent performance? Read all about it in Stephen Simpson's Schnitzer Feels the Squeeze.

Which sterling steel giant is trading at scrap-iron prices? Find out with a free 30-day guest pass to Motley Fool Inside Value.

Fool contributor Rich Smith does not own shares of any company named above.