A Steel Reserve Has Been Needed By Investors Lately

A Steel Reserve Has Been Needed By Investors Lately

Steel Dynamics posted third quarter earnings of $0.25 a share, up from $0.06 last year. Although there were some notable weak spots, management painted a fairly bright long-term picture based on key projects coming online in the fourth quarter.

Solid as a steel sheet
Steel Dynamics' third quarter was up year over year and sequentially. The company pointed to improved pricing for steel sheets as core to the solid results. An increase in overall steel shipments was also helpful. Interestingly, competitor Nucor saw similarly strong sequential results, but couldn't boast of year over year earnings growth.

Steel Dynamics highlighted strength in the galvanized and painted sheet areas, as well as solid demand in the HVAC and appliance markets. That said, management noted that customers appear to be hesitant to increase their inventories, which will continue to hamper the entire steel industry in the near term. This trend, however, could set up a robust rebound if markets improve quickly since customers will be forced to rapidly increase purchases. If not, slow and steady will remain the pace—but that's an environment in which the company is currently performing quite well.

Struggling a bit
Two notable weak spots for Steel Dynamics were its scrap business and its pig iron joint venture, both of which hold important strategic long-term appeal. Income at the company's metal recycling business fell 29% sequentially in the third quarter. However, that business supplies around half of the company's metal needs and allows it to more tightly control its costs. So, despite the ups and downs, it is a valuable asset and not a big concern.

Sub-par results at the company's pig iron joint venture are more troublesome. This project is also intended to help the company reduce its costs, but hasn't lived up to expectations. While Steel Dynamics remains upbeat about the prospects here, you should keep an eye on it. It could quickly turn into a performance drag if the quality of the plant's output doesn't improve.

Coming on line
Looking to the future, Steel Dynamics has two projects expected to come on line in the fourth quarter. The first is a premium rail facility and the second an expansion that allows the company to enter a new bar market. Both of these projects will really ramp up over the next year or so, meaning that their fourth quarter contribution won't likely be that large. However, investors will want to keep an eye on their progress.

Interestingly, Nucor has the opposite trend taking shape. The company is set to shut several plants for upgrades in the fourth quarter. While these improvements should bolster Nucor's long-term outlook, the downtime will likely lead to a sequential earnings drop in an already cyclically weak period for the steel mill.

In fact, the impact of a single plant can be quite material. For example, AK Steel experienced a problem with one of its mills early in the third quarter. It expects a nearly dime per share impact to earnings after offsetting insurance reimbursements. And while that plant is out of commission, AK Steel isn't making money from it but still has the expense of the repair to deal with.

That's no different than Nucor's planned outages, only Nucor is paying to upgrade its facilities. Look for AK Steel to continue to struggle until this plant, one of its just nine facilities, gets back up to speed. Nucor, meanwhile, has already warned investors to expect lower earnings in the final period of the year.

Good now, better tomorrow
Steel Dynamics turned in a good quarter, despite some weak spots you should keep an eye on. That said, AK Steel's troubles show just how important a single mill can be. With two new projects set to come on line, the real story at Steel Dynamics isn't the third quarter, but the next four or five.

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The article A Steel Reserve Has Been Needed By Investors Lately originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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