Three months ago, we took our first look at Russian newcomer to the NYSE Mechel (NYSE:MTL). To be honest, the steel giant didn't exactly impress, as it turned in a profits report down by nearly two-thirds from what it had earned one year ago. Can it improve on that performance when it reports second-quarter 2006 earnings Wednesday morning?

What analysts say:

  • Buy, sell, or waffle? Nine analysts follow Mechel; six of them say it's a buy; two more a hold; and one votes sell.
  • Revenues & Earnings. None of the analysts have made public their estimates for how much Mechel either sold or earned in the quarter.

What management says:
In reviewing his company's fiscal Q1 2006 results, COO Alexey Ivanushkin admitted that it had been a tough quarter for Mechel. The firm's biggest business by tons shipped, coal mining, saw single digit declines in tons shipped and revenues booked on those tons, plus a huge drop in profits. Ivanushkin attributed the weakness in this segment mainly to "a decline in prices for coking and steam coal, the main products of our mining segment." Looking forward toward the second-quarter results that will be reported on Wednesday, he warned that the "global situation remains difficult" in this segment.

That said, Ivanushkin also pronounced himself "encouraged by the signs of recovery in our steel segment" which, although far smaller than the coal business in terms of tonnage, is the more important business in terms of profits. The steel business contributes roughly three-quarters of Mechel's revenues, but currently only about one-fifth of profits. Improving the profitability of its steel sales will be key to growing Mechel's earnings.

What management does:
Over the last 18 months, Mechel's gross, operating, and in particular its net profit margins have all contracted significantly. Ivanushkin sees the trend as clearly as you and I can (on the table below). While he promises that "improving the profitability of our steel operations over the long-term" will be a key objective at Mechel, to date we've seen little signs of success on this front.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

38.8

40.7

37.5

36.9

35.1

31.7

Op.

20.8

22.3

18.4

17.3

14.2

10.4

Net

36.9

36.2

31.9

30.4

10.0

7.6
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:
Integration is all the rage in steel circles these days, with groups like Europe's Mittal (NYSE:MT) and India's Tata leading the charge. That being the case, investors could well find Mechel attractive for its vertically integrated holdings in coal, iron ore, nickel, steel, rolled products, and hardware.

That said, Ivanushkin confirms that Mechel considers mining to be its "core business." So investors may take some comfort in the fact that when Mechel reported operating results for the first half of 2006 (just days after releasing its official Q1 earnings results), it described marked improvement in tons of mining products shipped (versus H1 2005), including upper-single digit increases in tons of coal and iron ore shipped. Meanwhile, on the subject of improving the profitability of the steel division, Ivanushkin highlighted the fact that Mechel has increased its production of "higher value-added products while cutting down raw materials usage." Lower input costs plus higher margins on output can be expected to give the company a bump in its gross margins, at least, when we see the results on Wednesday.

Still unacquainted with the company? Read our last Foolish Forecast and take the opportunity to meet Mechel.

Mittal is a Motley Fool Inside Value recommendation. To find out why, start a free 30 day trial here.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy that is as strong as steel.