October 19, 2009 Steel Dynamics Inc. (STLD) $15.32Goldman Sachs Global Investment Research 1
October 19, 2009
COMMENT
Steel Dynamics Inc. (STLD) $15.32
First Take: Solid 3Q beat – in line guidance; reiterate Buy
News
STLD reported a net profit of $0.30 per diluted share for 3Q09, better thanour estimate of $0.24, consensus of $0.23, and its updated guidance rangeof $0.20 to $0.25 (from September 10th). It indicated that the flat-roll steelbusiness continues to run at near full capacity and its bar divisions arerunning at 60-70% of capacity. However, its Structural & Rail division isoperating in the low 30%-range.Steel Dynamics expects lower earnings in 4Q09, owing to easing utilizationrates in the seasonally weak quarter (which is expected by the market).The company expects to earn a small profit for FY2009, which implies4Q09 earnings of
at least
$0.15/share (our current estimate is $0.21).Quantitative guidance for 4Q will be provided later in the quarter.
Analysis
The big positive surprise came from STLD’s
Recycling Operations
, whichreported an operating profit of $45 mn (or $31/ton) vs. our $26 mn (or$23/ton). This beat is primarily due to over 30% better-than-expectedvolumes, which more than offset 12% lower-than-expected prices.Although the
Steel Operations
operating profit dramatically improved to$128 mn ($110/ton) from $36 mn ($43/ton) last quarter, it was still belowour own estimate of $133 mn ($122/ton) as higher-than-expected scrapcosts offset better-than-expected shipment volumes.
Steel Fabrication
reported a $3.3 mn operating loss vs. our expectationsof a modest $0.5 mn profit on lower-than-expected volumes and pricing.
Implications
We view the beat as positive and maintain our Buy rating on STLD. Theguided decline in 4Q09 is widely expected as the quarter is seasonallyweak; both we and consensus are already forecasting the drop-off. Worse-than-expected fabrication results reinforce our negative view on CMC(Neutral, $17.85) and GNA (Neutral, $8.50) heading into their earningsevents. Our estimates and price target are unchanged.
INVESTMENT LIST MEMBERSHIP
Americas Buy List
Coverage View:
Neutral
United States:Steel
Sal Tharani
(212) 357-0695 | sal.tharani@gs.com Goldman, Sachs & Co.
David Stevens
(212) 902-4581 | david.stevens@gs.com Goldman, Sachs & Co.
The Goldman Sachs Group, Inc. does and seeks to do business withcompanies covered in its research reports. As a result, investors shouldbe aware that the firm may have a conflict of interest that could affectthe objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision. For Reg ACcertification, see the end of the text. Other important disclosures followthe Reg AC certification, or go to www.gs.com/research/hedge.html.Analysts employed by non-US affiliates are not registered/qualified asresearch analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
October 19, 2009 Steel Dynamics Inc. (STLD) $15.32Goldman Sachs Global Investment Research 2
How 3Q2009 results differed from our estimates
Exhibit 1:
Earnings highlights: 3Q2009 results versus our estimates
in millions, except per-share and per-ton amounts
STLD-3Q 20093Q-09A3Q-09EAbsolute%3Q-08AAbsoluteY-o-Y2Q-09AAbsoluteQ-o-Q4Q-09EdifferenceChangedifference%difference%Net sales1,172.21,002.6169.616.9%2,563.9(1,391.7)(54.3%)792.2380.048.0%868.0
COGS955.5827.1128.415.5%2,118.7(1,163.2)(54.9%)723.3232.232.1%713.7
Gross profit216.7175.641.123.4%445.2(228.5)(51.3%)68.8147.9214.8%154.3
Gross margin18.5%17.5%1.0%5.6%17.4%1.1%6.5%8.7%9.8%112.7%17.8%
SG&A and other operating expenses68.250.118.136.1%109.0(40.8)(37.4%)62.65.79.1%43.4
Operating income148.4125.423.018.4%336.2(187.7)(55.8%)6.3142.22,262.3%110.9
Operating margin12.7%12.5%0.2%1.2%13.1%(0.4%)(3.4%)0.8%11.9%1,496.4%12.8%
Interest expense34.535.0(0.5)(1.5%)37.4(2.9)(7.8%)37.0(2.5)(6.8%)32.4
Other (income) expense(2.2)(1.0)(1.2)(116.7%)(8.3)6.274.0%0.8(3.0)n.m.(1.0)
Pre tax income116.191.424.727.0%307.1(191.0)(62.2%)(31.5)147.6n.m.79.6
Tax rate40.8%39.0%1.8%4.6%37.1%3.7%9.8%47.6%(6.8%)(14.3%)39.0%
Net income (loss)68.755.713.023.3%193.0(124.3)(64.4%)(16.5)85.3n.m.48.5
Net income (loss) attributable to non-controlling interest(0.3)-(0.3)n.m.-(0.3)n.m.(0.5)0.245.7%-
Net income (loss) attributable to STLD69.055.713.323.8%193.0(124.0)(64.2%)(16.0)85.0n.m.48.5
EPS diluted$0.30$0.24$0.0626.5%$0.99($0.69)(69.6%)($0.08)$0.38n.m.$0.21Shares outstanding - diluted
234.1235.0(0.9)(0.4%)195.338.719.8%189.844.223.3%235.0
EBIT
148.4125.423.018.4%336.2(187.7)(55.8%)6.3142.22,262.3%110.9
EBITDA
200.4180.419.911.1%391.5(191.2)(48.8%)64.0136.3212.8%165.9
FCF per share
$0.11$0.01$0.101,591.4%($0.29)$0.40n.m.($0.10)$0.21n.m.($0.22)
STLD-3Q 20093Q-09A3Q-09EAbsolute%3Q-08AAbsoluteY-o-Y2Q-09AAbsoluteQ-o-Q4Q-09EdifferenceChangedifference%difference%
Steel operations
Shipments ('mn tons)1.1631.0830.080
7.4%
1.286(0.123)
(9.6%)
0.8380.324
38.7%
0.970 Average selling price ($/ton)$627$620$7
1.1%
$1,186($559)
(47.1%)
$594$33
5.5%
$675Revenues ($ mn)743.1671.771.4
10.6%
1,525.1(782.0)
(51.3%)
506.9236.2
46.6%
654.6Average scrap cost ($/ton)$229$220$9
4.3%
$546($317)
(58.1%)
$180$49
27.2%
$288Metal margins ($/ton)398.0$401($3)
(0.6%)
$640($242)
(37.8%)
$414($16)
(3.9%)
$387Operating profit ($ mn)128.4132.5(4.1)
(3.1%)
285.0(156.6)
(55.0%)
36.192.2
255.2%
86.0 Operating profit per ton ($/ton)$110$122($12)
(9.8%)
$222($111)
(50.2%)
$43$67
156.1%
$89
Scrap and scrap substitute operations
Ferrous scrap shipments ('mn tons)1.290.9500.344
36.2%
1.76(0.464)
(26.4%)
0.8400.454
54.0%
0.750 Non ferrous scrap shipments (million pounds)217.1190.027.1
14.2%
241.7(24.6)
(10.2%)
169.847.3
27.8%
180.0 Total scrap volume ('mn tons)1.4621.1080.354
31.9%
1.948(0.486)
(24.9%)
0.9710.491
50.6%
0.903 Average selling price ($/ton)$380$433($53)
(12.2%)
$667($288)
(43.1%)
$318$62
19.4%
$327Revenues ($ mn)555.2479.375.9
15.8%
1,300.0(744.8)
(57.3%)
308.9246.3
79.7%
295.0 Operating profit ($ mn)45.325.719.6
76.4%
101.0(55.7)
(55.1%)
3.641.7
1,164.0%
10.1 Operating profit per ton ($/ton)$31$23$8
33.7%
$52($21)
(40.2%)
$4$27
739.5%
$11
Steel fabrication operations
Shipments ('mn tons)0.0350.035(0.000)
(1.3%)
0.078(0.044)
(55.8%)
0.035(0.001)
(2.3%)
0.050 Average selling price ($/ton)$953$999($45)
(4.5%)
$1,413($460)
(32.5%)
$1,047($94)
(8.9%)
$934Revenues ($ mn)32.934.9(2.0)
(5.8%)
110.5(77.6)
(70.2%)
37.0(4.1)
(11.1%)
46.7 Operating profit ($ mn)(3.3)0.5(3.8)
n.m.
4.54(7.8)
n.m.
(0.0)(3.3)
n.m.
1.2 Operating profit per ton ($/ton)($94)$16($110)
n.m.
$58($152)
n.m.
($0)($94)
n.m.
$24
Source: Company data, Goldman Sachs Research estimates.
October 19, 2009 Steel Dynamics Inc. (STLD) $15.32Goldman Sachs Global Investment Research 3
Reg AC
I, Sal Tharani, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company orcompanies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specificrecommendations or views expressed in this report.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group andmarket. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on compositesof several methodologies to determine the stocks percentile ranking within the region's coverage universe.The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth
is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue.
Return
is a year one prospective aggregateof various return on capital measures, e.g. CROCI, ROACE, and ROE.
Multiple
is a composite of one-year forward valuation ratios, e.g. P/E, dividendyield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book.
Volatility
is measured as trailing twelve-month volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used forin-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Sal Tharani: America-Base Metals, America-Steel.America-Base Metals: ALCOA, Freeport-McMoRan Copper & Gold.America-Steel: AK Steel Holding, Allegheny Technologies, Commercial Metals Company, Gerdau AmeriSteel Corp., Gibraltar Industries, Inc., NucorCorp., Olympic Steel, Inc., Reliance Steel and Aluminum Co., Schnitzer Steel Industries, Steel Dynamics Inc., U.S. Steel Group, WorthingtonIndustries.
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companiescovered by the Global Investment Research Division of Goldman Sachs and referred to in this research.Goldman Sachs has received compensation for investment banking services in the past 12 months: Steel Dynamics Inc. ($15.32)Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Steel Dynamics Inc.($15.32)Goldman Sachs had an investment banking services client relationship during the past 12 months with: Steel Dynamics Inc. ($15.32)Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Steel Dynamics Inc.($15.32)Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Steel Dynamics Inc. ($15.32)Goldman Sachs makes a market in the securities or derivatives thereof: Steel Dynamics Inc. ($15.32)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution
Investment Banking Relationships
Buy Hold Sell Buy Hold SellGlobal 30% 53% 17% 51% 52% 43%As of October 1, 2009, Goldman Sachs Global Investment Research had investment ratings on 2,674 equity securities. Goldman Sachs assignsstocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Holdand Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions'below.
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Steel Dynamics (STLD)
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