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Key for Investors: Analyzing Steel Dynamics 2Q15 Earnings

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Part 4
Key for Investors: Analyzing Steel Dynamics 2Q15 Earnings PART 4 OF 7

Steel Dynamics’ Fabrication Operations Post Record Earnings

Steel Dynamics’ fabrication operations

Previously, we noted that lower steel prices took a toll on Steel Dynamics’ 2Q15 earnings. However, its fabrication operations delivered record earnings in the quarter. The segment’s performance has improved significantly over the last few quarters. Steel Dynamics has six fabrication plants spread across different regions. It manufacturers products like joists and girders. They’re mainly used in nonresidential construction.

Nucor (NUE) is the market leader in this segment. It’s followed by Steel Dynamics (STLD). Together, Nucor and Steel Dynamics account for ~9% of the SPDR S&P Metals and Mining ETF (XME).

Steel Dynamics’ Fabrication Operations Post Record Earnings

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Record earnings

The above chart shows the financial performance of Steel Dynamics’ fabrication operations. In 2Q15, the segment generated record operating income of $28 million—27% more than the previous record. The operating income per ton also rose 30% over 1Q15 to a record $252 per ton. The strong underlying demand from the nonresidential construction industry boosted the segment’s earnings.

US construction spending has exceeded $1 trillion on a SAAR (seasonally adjusted annual rate) for two consecutive months. Strong construction markets benefit companies like Commercial Metal Company (CMC) and Gerdau (GGB) as well. They’re leading rebar suppliers. Rebars—or reinforcing bars—are widely used in nonresidential construction.

Outlook for fabrication operations

According to Steel Dynamics, the record per ton profitability of fabrication operations might not be sustainable in the second half of the year. However, strong volumes could more than offset any decline in the per ton profitability. Construction indicators have been quite strong over the last few months.

Meanwhile, after posting an operating loss in the previous quarter, Steel Dynamics’ metal recycling operations also posted profits in 2Q15. We’ll discuss this in detail in the next part of the series.

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