Chaparral Steel (NASDAQ:CHAP), the "second largest supplier of structural steel products in North America," reports its fiscal Q4 and full-year 2006 earnings tomorrow after close of market. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Only three analysts follow Chaparral, but each of them rates the stock a buy.
  • Revenues and earnings. The company doesn't seem to have published any specific expectations for this quarter's revenues or earnings, but it does say that it expects to see a total of $6.07 in profits per diluted share for the year. If correct, that would make for a 77% improvement over last year's result.

What management says:
In discussing his firm's strong performance last quarter, CEO Tommy Valenta noted that the steel industry in general has been benefiting from "improved global demand, industry consolidation and low cost production," but credited his company's employees for Chaparral's being able to take advantage of these trends.

Also beneficial, one would assume, was the fact that "energy expense was down 20% from the second quarter as a result of a dramatic decrease in natural gas prices in January and February." For those who pay attention to these things, one of Valenta's primary complaints two quarters back was that Chaparral's results had been "hampered by volatile energy costs."

What management does:
Problem solved. Thanks to the dramatic drop-off in natural gas prices, Chaparral saw its rolling gross margins rebound sharply last quarter after declining for nearly a year. With the strong gross margins to work with, Chaparral's rolling operating and net margins improved considerably as well.

Margins %

11/04

2/05

5/05

8/05

11/05

2/06

Gross

16.7

18.5

17.1

14.5

14.6

17.5

Op.

13.9

15.8

14.5

12.1

12.1

14.4

Net

6.4

7.8

7

5.8

6.4

8.4
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:
Judging from Valenta's comments back in March, we should see continued strength out of Chaparral in tomorrow's news. Chaparral was optimistic that demand for its products would remain strong in its fiscal Q4, a sentiment echoed around the same time by Schnitzer Steel (NASDAQ:SCHN), which sells into some of the same markets. Chaparral also foresaw stable pricing that would help to keep its margins solid.

The main risk raised was the one that hurt the company in fiscal Q2: energy costs. Valenta warned that if the weather was warm in fiscal Q4, this "may have a negative impact on margins compared to third quarter results," as the same natural gas that fires Chaparral's furnaces is also used to cool consumers' homes. But considering how mild the weather had been in the U.S. prior to June's heat, I doubt that will turn out to have been a problem.

Competitors:

  • Commercial Metals (NYSE:CMC)
  • Gerdau Ameristeel (NYSE:GNA)
  • Mittal (NYSE:MT)
  • Nucor (NYSE:NUE)
  • Steel Dynamics (NASDAQ:STLD)

Mittal Steel is a Motley Fool Inside Value pick. Take the newsletter for a 30-day free spin.

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