Why Commodity Producers Will Produce the Goods in 2012
While the equity market gets high off the fumes of Alcoa's optimistic outlook, another industrial bellwether is still reeling from the impact of some noteworthy market softness during its fiscal first quarter of 2012.
Schnitzer Steel (NAS: SCHN) was looking lean and mean last summer when the metal scrapper pumped iron to achieve earnings of $1.17 per share. Fast-forward a couple of quarters, and the company is in serious need of a workout session with Hans and Franz to pump it back into shape. Schnitzer hoisted first-quarter earnings of just $0.25 per share, which actually did strike the high end of revised guidance delivered before the holidays.
The primary culprit here is a nemesis we've seen Schnitzer and its rivals battle before: margin compression. As steelmakers worldwide dialed back their raw-material purchases in the face of considerable macroeconomic uncertainty late last year, prices for scrap iron fell far faster than Schnitzer's average inventory cost. The inherent vulnerability of operating margins to near-term price volatility is precisely why I personally tend to steer clear of the metal scrappers entirely. I prefer to retain my focus at the top of the production chain, where miners like Cliffs Natural Resources can only have their margins squeezed from one end rather than two.
But conceding my own preference for the miners of raw material does not mean the scrappy steel makers can be ignored. Quite to the contrary, my longtime favorite stock in the steel sector has cracked some serious thunder lately with a noteworthy surge accompanied by a powerful dividend kicker! Nucor (NYS: NUE) has advanced a remarkable 38% from its lowest close in 2011 just over three months ago, and continues to entice investors with a 3.55% dividend yield. Behind that surge lies some "real demand improvement" that Nucor conveyed last month with respect to automotive, heavy equipment, energy, and general manufacturing end markets.
Throughout the gut-wrenching collapse in commodity stocks that characterized the latter portion of 2011, I remained steadfast in my view that demand-related concerns would prove a near-term blip within the longer-term trend for growing global demand. So when the investment world was selling shares of Peabody Energy (NYS: BTU) in a sustained and indiscriminate rush for the exits, this Fool was happy to scoop up the bargain. Accordingly, Peabody Energy earned my selection as the top energy stock for 2012.
Within its latest quarterly release, Schnitzer Steel echoed my bullish long-term commodity outlook by stating: "Despite the short-term volatility, all indications are that long-term demand fundamentals in our export markets remain strong, primarily due to expectations for further growth and increasing urbanization in developing economies, and increasing usage of recycled metals globally." Because bellwethers like Alcoa, Nucor, Schnitzer, and others continue to corroborate my view that industrial commodity demand is likely to remain far more robust that last year's equity market dynamics would seem to suggest, I continue to view the shares of quality commodity producers as the most attractive equity sector for 2012.
- Add Schnitzer Steel to My Watchlist
- Add Nucor to My Watchlist
- Add Alcoa to My Watchlist
- Add Cliffs Natural Resources to My Watchlist
At the time this article was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Peabody Energy. 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 adisclosure policy.
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