Why Steel Dynamics Stock is Still a Steal

Steel Dynamics (NASDAQ:STLD) stock is up 38% this year and trading at a record high. There may be plenty more where that came from.
Why Steel Dynamics Stock is Still a Steal
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Steel Dynamics (NASDAQ:STLD) stock is up 38% this year and trading at a record high. There may be plenty more where that came from.

One of the country's leading steel producers, Steel Dynamics stands to benefit from favorable supply and demand dynamics that have sent steel prices to record levels of their own. Global demand for steel is on the rise due to a boom in construction and manufacturing activity that are showing little sign of slowing down.

With the economic recovery underway, steel will play a major role in building the world's roads, bridges, cars, and appliances. This gives a relatively young steel company like Steel Dynamics a major opportunity to grow up fast.

Let's learn more about what the company does, its latest earnings, and where the stock could go from here.

What Does Steel Dynamics Do?

Based in Fort Wayne, Indiana, Steel Dynamics produces a broad range of steel products and recycled metals. Based on sales, approximately two-thirds of its products are considered value-added steels. This means that they are specialty products that are stronger, harder, or more crack resistant than regular steel. Coated sheet and cold roll sheet metal fall under this category as do certain shaped, engineered, and railroad steel products. The value-added segment is a good place to be because this is considered the premium end of the steel market.

Steel Dynamics products are used by a range of end markets. Roughly half of its steel shipments go to customers involved in construction—residential construction, commercial construction, metal building, appliances, and HVAC projects. The rest goes to the transportation, energy, agriculture, mining, and manufacturing markets.

Last year Steel Dynamics shipped 10.7 million tons of steel and recycled 4.6 million gross tons of ferrous metals. Much of the recycled metal stays in house. Last year nearly 70% of recycled ferrous metal shipments went to the company's own steel production. This makes for a unique, low-cost business model that has less of an external need for iron ore or other production inputs.

How Did Steel Dynamics Perform in Q1?

After a strong 2020, Steel Dynamics started out this year by posting record first-quarter sales and profits. Sales were up 37.6% to $3.5 billion as even though steel shipments were flat compared to the prior year, sharply higher pricing drove the result. And although scrap input costs increased, this was more than overcome by record realized prices for flat roll steel and strong long steel products.

To put into perspective how rapidly rising steel prices are benefitting Steel Dynamics, first-quarter steel selling prices climbed 28% since the fourth quarter to $1,041 per ton. Going forward, as steel shipments rise and steel pricing remains elevated, the numbers should get even better. This is what the market seems to be anticipating in bidding up Steel Dynamics stock.

First-quarter net income increased to $431 million compared to $187 million in the prior year period. Earnings per share (EPS) came in well ahead of the consensus expectation of $1.98. The $2.10 EPS figure excluded a $0.07 per share cost related to the construction of Steel Dynamics' new flat roll steel mill in Sinton, Texas. The investment is expected to generate freight benefits and create shorter lead times for the company.

Understandably, management struck an upbeat tone in looking ahead to the remainder of 2021. It noted strong global steel demand as well as "extremely low" steel inventory held by customers across multiple end markets. The automotive, construction and transportation sectors are pockets of strength that should remain a strong source of demand.

 Is it a Good Time to Buy Steel Dynamics Stock?

Aside from the strong steel pricing backdrop, what makes Steel Dynamics an attractive investment is the diversified customer base including significant exposure to the construction industry. As the U.S. economic recovery unfolds, residential and commercial building activity is expected to remain strong.

In addition, the Biden administration's proposed $2 trillion infrastructure package would allocate funds to fixing the country's roads and bridges. This would help sustain steel demand, support steel prices, and prop up Steel Dynamics' financial results for years to come.

Only 15% of the company's cost structure is fixed which helps it operate as one of the lowest-cost steel producers in North America. And since it can charge more for its value-added products, profit margins are relatively strong.

Despite the run that Steel Dynamics stock has enjoyed off its March 2020 bottom there's no reason to believe it can't keep moving higher. The company is experiencing the perfect storm of strong steel demand and low customer inventory amid an economic rebirth.

At roughly 7x forward earnings and less than 1x the annualized first-quarter sales number, Steel Dynamics is still undervalued relative to its steel producing peer group. This valuation along with the 2% dividend yield makes it a steal for long-term investors.

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