Which Metric should we use for Steel Dynamics?
There are several metrics to measure the profitability of a company. Earnings before interest, depreciation, amortization and taxes (or EBITDA), gross profits and net profits are the major metrics looked at by analysts. For steel companies, which is cyclical in nature and is characterized by high interest costs and depreciation expenses (which is basically a reflection of its capital intensity), EBITDA margin has been a frequently used metric. EBITDA is independent of capital structure of a company and generally less dependent on accounting practices. Let’s analyze the EBITDA margins for Steel Dynamics compared to its peers.
Steel Dynamics has a track record of superior EBITDA margins
The chart above shows the EBITDA margins for Steel Dynamics since 2004. This period covers the boom preceding the recession of 2008 as well as the recovery phase which steel industry has witnessed since 2010. As you can see Steel Dynamics has consistently delivered higher EBITDA margins compared to its peers. Even during the peak of crisis when industry dipped into losses, Steel Dynamics was able to deliver double digit EBITDA margins. This is a major achievement given the fact that steel shipments dipped by almost half during this period.
Why Steel Dynamics has a track of higher margins
We have seen that Steel Dynamics enjoys higher margins as compared to other steel companies. There are several reasons for this superior performance. Steel Dynamics is the nation’s lowest cost steel producer. Another reason has been higher utilization rate, which Steel Dynamics has historically maintained. It also has control over its raw material supply through iron ore mines and metal recycling facilities. Another key reason has been steel production through EAF route which provides the operational flexibility to Steel Dynamics.
Let’s analyze how the superior profits have been greeted by the markets. In the coming sections, we will analyze the stock market performance of Steel Dynamics and compare it with other leading steel makers like Arcelor Mittal (MT), United States Steel Corporation (X), and Nucor Corporation (NUE). Some of these companies are also part of SPDR S&P Metals and Mining ETF (XME).