Steel Dynamics Raises Debt - Analyst Blog

Steel Dynamics Inc. (STLD), the fifth largest US steel producer, has raised $350 million by issuing 8% senior notes due 2020 through a private offering. The company intends to use the proceeds from the notes to finance capital expenditure and acquisitions as well as debt repayment.

As of December 31, 2009, Steel Dynamics’ balance sheet reflected a total debt of $2.6 billion. The company’s debt-equity ratio was comfortable at 1.03 times that of December 31, 2009. The company’s net cash position (cash less total debt, including current portion) as of December 31 was a net deficit of $10.2 per share.

Cautious Guidance

A week earlier, Steel Dynamics had forecasted a feeble earnings outlook for the first quarter of 2010 citing weakness in its structural steel products and Steel Fabrication segment operations. Steel Dynamics expects earnings of 22 cents to 27 cents per share in the first quarter. The average of the earnings range of 24.5 cents is slightly below the Zacks Consensus Estimate of 25 cents and market estimate of 26 cents. However, in contrast, the company had posted a net loss of 48 cents per share for the first quarter of 2009 and had earned 12 cents in the last quarter of 2009.

According to management, Steel Dynamics has continued to benefit from healthy orders and pricing improvement at its sheet and special-bar-quality steel operations. The company also sees scrap prices improving during the quarter. Management anticipates strong demand for the company’s flat-rolled steel products from the automotive end markets. However, Steel Dynamic’s structural steel and downstream fabrication operations are expected to remain weak.

Steel Dynamics has been cutting costs and ramping up production. The company is focusing on cost reduction through higher production and increased shipping volumes in the Flat-Rolled product segment. Management is optimistic about the industry picking up in the near future.
We expect Steel Dynamics to perform better in the long term on stronger industry trends driven by inventory restocking and demand recovery as well as a continued rise in steel prices.

Zacks Recommendation

Our long-term Neutral recommendation on Steel Dynamics reflects margin pressure in the Metals Recycling segment from lower-than-expected volumes. We believe that return of profitability in the company’s Fabrication segment’s should also take longer than expected. We are also wary of a weaker-than-expected recovery of production utilization rates in the company’s long steel products business under its Steel Operation, which is around 40% for Structural & Rail products and mid 50% for most of the other businesses. 

However, we are positive on Steel Dynamics’ higher Flat-Rolled products mix, which forms about 67% of shipments. Costs in the segment benefited from high utilization rates in the recent quarter and the company was able to maintain strong levels of profitability. We expect margins to benefit from higher flat-rolled steel product prices in the next couple of months.

We also remain positive on Steel Dynamics’ long-term growth prospects, including the Mesabi Nugget project in Minnesota for the mining of iron ore and the production of pure iron nuggets. These iron resources will be used to lower the cost of steel production in Steel Dynamics’ electric-arc-furnace mini mills.

Peer Comparisons

Steel Dynamics has outperformed its close peers including Nucor Corporation (NUE) and United States Steel Corporation (X). Nucor posted a loss of 94 cents per share for the full year 2009, in sharp contrast to a profit of $5.98 per share for 2008. Moody’s Rating Agency (MCO) recently downgraded Nucor on weak results.

U.S. Steel reported losses of $10.42 per share in 2009, compared with full year 2008 net income of $17.96 per share. The company expects losses for the first quarter of 2010. Fitch Ratings downgraded U.S. Steel Corporation to junk status on account of a lack of visibility about the company's return to profitability.
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