Analyst Sees Wider Margins For Steel Dynamics

Steel Dynamics, Inc. STLD will see widening margins in the second half of 2015 resulting from lower costs for scrap and receding competition from imports, an analyst said Thursday.

Morgan Stanley's Evan L. Kurtz reiterated an Overweight rating and $28 target on the company and said conditions in the steel business have hit bottom.

The company, which provided an earnings outlook for its first quarter Wednesday, gave back some of its recent gains and changed hands Thursday at $19.40, off 4.5 percent.

Kurtz said Wednesday's outlook "removes a key overhang" on the company's shares. "We see upside as steel prices inflect," Kurtz said.

The company's margins will improve beginning in the second half of 2015 as steel prices stabilize and the cost of scrap declines.

Kurtz said scrap prices will still fall further, in order to hit a sustainable level relative to the relatively low cost of iron ore.

The price of U.S.-made steel, meanwhile "has overshot its sustainable spread" relative to Chinese imports, Kurtz said.

With reasonably strong demand from the auto industry and construction, Steel Holdings expects oversupply in the market can be worked off by April or May, leading to higher capacity utilization.

The company forecast first-quarter adjusted earnings of $0.12 to $0.16 a share, versus Wall Street's expectation of $0.21 a share.

But many investors were expecting break-even earnings for the quarter, Kurtz said, adding that he believes the guidance is "actually above buy-side expectations."