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 (NASDAQ:TONS), to be exact. First and most specific to Novamerican itself, the firm managed to best Wall Street's expectations for its fourth quarter 2006 by reporting numbers that, although down year over year, were nonetheless pretty good, considering.
Considering what?
Considering that big-league steel producers like Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) had just finished issuing earnings warnings, for one thing. And considering that Novamerican had been suffering from the same inventory glut that Nucor and Steel Dynamics were complaining about, for another.
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.
The future
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 (NYSE:MT) and its peers appear willing to cut production if necessary to stabilize pricing), and the potential for a "slight increase in demand relative to the fourth quarter." If those theses prove out, they should spell good news not just for Novamerican, but for pretty much everyone involved in the supply side of this industry. (And yes, sadly, bad news for heavy steel users like DaimlerChrysler (NYSE:DCX), Ford (NYSE:F), and GM (NYSE:GM)).
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.
By the way, if you missed the interview when it first ran, you can read some of it here, and all of it here (so long as you're a Motley Fool Inside Value subscriber).
If you're not an Inside Value subscriber, you can see what the newsletter has to offer by taking a free 30-day trial today. There's never an obligation to buy, and you'll have instant access to the current issue as well as features like other exclusive executive interviews and subscriber-only discussion boards. Mittal used to be an Inside Value recommendation.
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.
