Steel investors got themselves a pair of good news items last week, both rolled up in a single earnings release out of the frozen north -- from Canadian steel processor Novamerican Steel
Considering that big-league steel producers like Nucor
Indeed, as revealed in last week's news, that inventory glut continues to plague Novamerican, where inventories ended the year 28% higher than at the same point in time in 2005. On the bright side, though, inventories reversed course from the third quarter, and after three consecutive quarters of rising numbers, began to decline in Q4.
And the numbers?
Here's how they looked for fiscal 2006:
- Profits were up 19% to $4.25 per diluted share.
- Sales grew a bit less than 1% to $840.8 million total. While not impressive in and of itself, it's worth pointing out that Novamerican sold 4% fewer tons of metal in 2006 than in 2005, and processed 15% fewer tons for its customers. That dollar revenues increased at all in the face of such volume declines is surprising.
All of that's fine and dandy for Novamerican, but I also said there was good news for the steel industry as a whole. To find that, we turn to the end of Novamerican's earnings release, where management says: "The decline in steel prices, resulting from weakened demand and an oversupply of steel in the fourth quarter, appears to be over." The firm sees price-depressing imports dropping off early in 2007, "domestic steel mills... committed to price stability" (i.e., Mittal
One last thing
Before signing off, I want to highlight one last factoid from Novamerican's report. Specifically, the quadrupling of capital spending from 2005 to 2006, which helped the firm's free cash flow turn negative for the year. Some might find that spurt of capital investment surprising -- but not Fool readers. In our interview with Novamerican President Scott Jones last year, he clearly stated that the firm needs "to put [its copious piles of] cash to work," and planned to "continue expanding our business as we have in the past, not through acquisitions but through Greenfield projects [in] areas where both margins and barriers to entry are high." The firm's $10.9 million in "proceeds from disposal of property, plant and equipment" also match up well with Jones' promise to "be exiting lower-margin business and moving up the value chain." Don't be surprised if in coming years, Novamerican's margins begin to improve even further as these plans bear fruit.
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Read more Foolishness here:
- Foolish Forecast: A Low Bar for Novamerican Steel
- Novamerican Not Buying Yet
- Foolish Forecast: TONS of Earnings Fun
Fool contributor Rich Smith does not own shares of any company named above.