Steel Dynamics Has 33% Upside According To Citi

According to Citi’s Alexander Hacking, Steel Dynamics, Inc. STLD “is one of the lowest cost operators in the US with its relatively younger and highly productive EAF mills that use a largely non-union labor force with pay tied to performance.”

Hacking initiated coverage of the company with a Buy rating and price target of $33.

The Positives

The analyst pointed out that Steel Dynamics has been generating mill EBITDA margins 5 percent above the industry average over the last five-year and 10-year period.

The company has also been investing internally in “smaller scale, lower-risk and short payback organic projects” in order to improve its value-added mix and also help up new end-markets, while supporting margins.

Related Link: Steel Dynamics Completes Acquisition Of Vulcan Threaded Products

Hacking also mentioned that Steel Dynamics has been focusing on M&A, especially downstream opportunities that can “generate pull through demand for their mills and have EBITDA margins above the company average.”

The analyst pointed out that the company’s growth initiatives are being supported by the relatively low leverage, consistent track record of FCF generation and record liquidity.

Some Negatives Too

On the other hand, overall operating margins have decline from the 16 percent seen in 2004–2008 to about 5–7 percent since 2010.

“In addition to a decline in Steel Mill segment margins across the industry, the purchase of OmniSource in 2007 and the Mesabi Nugget investment have been large contributors to declining margins and ROIC,” Hacking noted.

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