Centenarian Canadian steel maker Algoma Steel (OTC BB: ALGOF.PK) reports fourth-quarter 2006 earnings results on Wednesday. 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? Seven analysts follow Algoma. They give the company five buy ratings, one hold, and one sell.
  • Revenues. On average, they predict a 10% slide in quarterly sales to $430.5 million.
  • Earnings. Profits are predicted to decline by a penny (an American one) to $1.37 per share.

What management says:
Ever since interviewing the president of Canadian metals processor Novamerican (NASDAQ:TONS) last year, I've been meaning to look into this company, and Wednesday's earnings report provides as good an excuse as any. Algoma isn't making this easy, however. The company hasn't made an SEC filing in nearly a year, but it does have a recent investor presentation on its website, so that's where we'll start.

According to the presentation, Algoma is "consistently one of the most profitable North American steel producers in the last three years." It claims to lag only Oregon Steel (now part of Russia's Evraz) and Ipsco (NYSE:IPS) and to outperform such better-known companies as Steel Dynamics (NASDAQ:STLD), Nucor (NYSE:NUE), Mittal (NYSE:MT), and U.S. Steel (NYSE:X) on operating profit per ton of steel produced.

What management does:
However, the presentation also shows that Algoma was much more profitable in 2005 than in 2006 -- a fact borne out by the table below, which shows the firm's profitability declining through 2005 and into early 2006, before making a recovery as 2006 progressed.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

36.3%

30.0%

25.4%

22.8%

21.6%

23.6%

Operating

30.8%

25.1%

19.0%

14.8%

15.0%

16.9%

Net

19.7%

15.9%

12.5%

9.6%

10.3%

11.3%
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 presentation also illustrates a few of the steps Algoma has been taking to get its margins moving back up. For example, the company has reduced its workforce by 22% and aims to make further reductions through the retirement of current employees. It has increased production of both coke and steel, and it intends to increase production further and concentrate on higher-margin products to boot. It is also making efforts to reduce the amount of energy used in production, a move that should translate into lower operating costs and higher operating and net margins.

Algoma's internal emphasis on boosting margins tells me that investors should also focus on this factor when judging the company's performance. On Wednesday, therefore, I'd say the important things to look at are increases in volume of shipments, and decreasing or moderating operating costs.

I'd also keep an eye on free cash flow. Operating cash flow has been erratic at the company -- it has ranged from just $67 million in 2003, for example, to as much as $543 million in 2004. More consistent should be the capital-expenditures side of the equation. The company explains in its presentation that it anticipates averaging $60 million (not sure whether that is in greenbacks or Canadian money) in annual capital expenditures, with two-thirds of that amount being "maintenance capex" necessary to keep the business running, and another $20 million to be spent on improvements and expansions. By the way, 2006 will be on the high side at $70 million.

Did you miss Rich's interview with Novamerican president Scott Jones? Catch it now at our Motley Fool Inside Value newsletter service, where Mittal is a former recommendation. You can also get a free trial subscription to Inside Value for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.