Owing to a deteriorating net income, frail operating cash flow, disappointing return on equity and lower growth in the consumption of steel across the globe, Steel Dynamics (NASDAQ: STLD) was downgraded from “buy” to “hold” today by “The Street Ratings”.
The Indiana-based steel product manufacturer principally operates in three segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations. The fiscal 2012 third-quarter results, declared two days ago, disappointed the market yet again.
Net sales for the third quarter ended September 30 declined to $1.69 billion from $2.04 billion in the year-ago corresponding period. The revenue estimate of 14 analysts polled by S&P Capital IQ was $1.79 billion for the reported quarter.
Net income for the third quarter 2012 decreased to $12.8 million, or $0.06 per share, from $43.3 million, or $0.19 per share, in the prior-year corresponding quarter. For the quarter, the EPS estimate of analysts was $0.12 per share.
Excluding the non-operating charges, which included re-financing activities amounting to $26.3 million, repayment of $170 million of debt that will result in a savings of $20 million by 2013, and non-cash impairment charges of $7.9 million, the adjusted third-quarter earnings per share was $0.15.
The company’s revenue continued to shrink in the past three sequential quarters. Back in December 2011, the report of a 1% growth in world steel production and a Motley Fool report recommendation triggered a rally that led Steel Dynamics’ share price from $12.04 to $16.48 in February 2012. The rally was aided by a 1.7% growth in the December 2011 global steel production and fourth-quarter revenue and earnings that met and beat estimates, respectively.
After trading above $14.00 per share until the first week of April, the shares of Steel Dynamics fell sharply following an Investopedia report that underlined the pricing challenges in the steel sector. The first-quarter results, even though above analysts’ estimates, failed to rejuvenate the market due to warnings from the company about the possibility of a future decline in the earnings. On May 17, the shares of Steel Dynamics were traded below the book value of $10.71 per share. A week later, “The Street Ratings” downgraded the stock to “hold” from “buy”.
After consolidating at around $10.50 per share for a month, Steel Dynamics recovered to $12.60 per share in the third week of July. However, disappointing fiscal 2012 second-quarter results took the share price back to around $11.50. By mid-August, Steel Dynamics had recovered to $13.45 per share due to a Seeking Alpha report that predicted the bottoming out of the steel industry in the fourth quarter of fiscal 2012. Dahlman Rose downgraded the stock from “buy” to “hold” on August 22. That decision eroded the share price to $11.80 on September 5.
The third-quarter earnings guidance and dividend declaration took the share price back to around $13.00 on September 14. However, following the gloomy third-quarter 2012 results reported on October 17 and a stock downgrade today, the share prices made a downhill journey.
The World Steel Association anticipates a 2.1% growth in steel consumption this year compared to 6.2% reported in the prior-year. The demand is expected to shrink further next year due to lower consumption from China and European debt crisis uncertainty.
Steel Dynamics ended the day at $12.56 per share, down $0.44 or 3.4% on a volume of 2.89 million shares.
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