Monday, January 24, 2011

Steel Dynamics (NASDAQ: STLD): Q4 Earnings Preview 2010

Steel Dynamics Inc. (NASDAQ: STLD), the fifth-largest US steelmaker, is scheduled to release fourth-quarter earnings before the opening bell on Monday, January 24, 2011. Analysts, on average, expect the company to report earnings of 9 cents per share on revenue of $1.60 billion. In the year ago quarter, the company reported earnings of 12 cents per share on revenue of $1.18 billion.

Steel Dynamics, Inc., together with its subsidiaries, manufactures and sells steel products in the United States. It operates in three segments: Steel Operations, Metals Recycling and Ferrous Resources Operations, and Steel Fabrication Operations.

In the preceding third quarter, the Fort Wayne, Indiana-based company's net income was $18.74 million, or 9 cents per share, compared to $69.02 million, or 30 cents per share, in the year-ago period. Revenue rose to $1.58 billion from $1.17 billion. Analysts, on average, expected the company to report earnings of 9 cents per share on revenue of $1.50 billion. 

Steel demand and production have improved nicely in the past year due to increased government support and more balanced demand. The rebound in demand has been largely attributed to -- at least in the US -- stronger auto and non-residential construction sectors. China posted a significant surge in steel imports last month; however stricter measures may reduce the nation's demand going forward.

A run-up in raw materials costs has helped steel mills press home higher prices with their biggest customers, especially auto makers and distribution centers. Epochal floods have inundated the coal mines of Queensland, Australia, which supplies nearly 70% of the planet's coking coal, used to smelt iron ore in blast furnaces, and therefore a crucial steel ingredient.

Last month, the company said that it expects fourth quarter earnings per diluted share, before certain asset impairment charges related to its fabrication operations, to be in the range of $0.05 to $0.10, consistent with third quarter 2010 earnings per diluted share of $0.09. The company is currently evaluating the assets of two idled fabrication locations for impairment based on current plans for their future use, as these plans were impacted by the company's recent purchase of additional joist locations and equipment. The company said that it currently estimates a fourth quarter impairment charge of $13 million to $15 million, or approximately $0.03 to $0.04 per diluted share. In recent weeks the company's sheet operations order entry and pricing have increased significantly, but were negatively impacted early in the quarter by reduced volumes and pricing. The company also experienced quarterly improvement in its long product steel operations, notably at its Structural and Rail Division, as volumes and pricing increased slightly and rail became a larger component of product mix. In addition, the Engineered Bar Products Division continues to maintain strong volumes and margins. As a whole, however, the steel operations financial performance appears to be consistent quarter to quarter. Comparative third quarter to fourth quarter metals recycling earnings will be slightly impacted by seasonally reduced volumes, and reduced non ferrous margins.

The company, known as a low-cost producer, is attempting to free itself from some outside raw materials suppliers by creating its own pig-iron replacement. Steel Dynamics has built the Mesabi Nugget plant at Minnesota in cooperation with Kobe Steel Ltd. of Japan, which has licensed the technology and provided equipment and technical support. Steel Dynamics, with 81 percent ownership, is responsible for operation of the plant and utilizes a substantial portion of the plant's output as feedstock for SDI's electric-arc furnace mini mills in Indiana. The plant makes iron nuggets that are about 95% pure to feed electric arc minimills and produce flat rolled steel. Conventional taconite plants typically produce pellets with an iron content of about 65%.

In terms of stock performance, STLD shares have gained nearly 5 percent over the past year.  

Full Disclosure: None.
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