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Does Steel Dynamics Offers Value after May Correction?

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Steel Dynamics

Steel Dynamics (STLD) has gained 3.1% in June. However, the stock has fallen 26.5% in the second quarter. The stock is trading with a year-to-date loss of 13.1%. Looking at the valuation, Steel Dynamics is valued at an EV-to-EBITDA multiple of 4.8x its 2019 estimates and at 5.1x its 2020 estimates. Analysts expect Steel Dynamics’ EBITDA to fall year-over-year in 2020. The company’s EBITDA is expected to fall sharply this year after its earnings hit a record high last year.

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Valuation

From a valuation standpoint, Steel Dynamics’ valuation multiples are lower compared to its long-term multiples. However, given markets’ obsession with the recession and the peak steel market sentiments, steel companies’ valuation multiples have taken a hit. Talking of earnings, it’s too early to comment on Steel Dynamics’ 2020 estimates. While US steel prices have fallen, steel scrap prices have also come down, which should provide some cushion to mini-mills like Steel Dynamics. Mini-mills mainly use steel scrap as raw material. For steel prices, given the current uncertain economic environment, the outlook for 2020 looks uncertain. However, one aspect that we need to consider is that the premium between US and international steel prices has narrowed sharply this year, which could limit more downside in US steel prices unless global steel prices tumble.

Leverage and growth

Steel Dynamics and Nucor (NUE) have comfortable leverage ratios to withstand another deterioration in steel prices. Steel Dynamics is also investing in growth including the 3 million per ton annum capacity steel mill. The mill is expected to start operations in the second half of 2021. The mill will likely propel Steel Dynamics’ earnings and shipments.

Steel Dynamics could be an option for investors who want to play steel relatively safe and still want to participate in the sector. Nucor (NUE) also offers a similar proposition.

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