Steel Dynamics, Inc. (STLD), Nucor Corporation (NUE): Stay Away From This Steel Stock

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Steel Dynamics: Is This Dividend Stock A Steal?Steel Dynamics, Inc. (NASDAQ:STLD) is a company that was founded by three ex-employees of another steel giant, Nucor Corporation (NYSE:NUE). Operating on the concept of ‘mini-mills,’ it’s one of the largest steel makers in North America with an annual capacity of 6.3 million tons. Steel Dynamics, Inc. (NASDAQ:STLD) is also one of the lowest-cost steel producers in the U.S. It declared its quarterly results last month, and earnings were inline with consensus estimates, while it managed to marginally beat expectations on revenue.

A look at performance

Sluggish Chinese growth and weak demand from Europe have put pressure on the steel industry. In addition, low prices for sheet and structural steel are also adding to the weak performance of most steel companies. 
As a result of the weakness, Steel Dynamics’ revenue fell 6% year-over-year to $1.8 billion and marginally beat consensus estimates of about $1.8 billion. Production took a hit as well due to increased imports of steel coupled with domestic oversupply in the reported quarter.

Steel Dynamics, Inc. (NASDAQ:STLD) reported quarterly earnings of $0.13 per share, which was inline with consensus estimates, so it did fairly well on this front; more so if we look at how another steel maker, Schnitzer Steel Industries, Inc. (NASDAQ:SCHN), witnessed a complete meltdown of its earnings and revenue. Things do not look so bad for Steel Dynamics, Inc. (NASDAQ:STLD), in my opinion.

Looking ahead

Steel Dynamics, Inc. (NASDAQ:STLD) is expecting continued demand for high-quality steel from the automobile industry, the manufacturing sector and residential construction in 2013. It is also looking at improvements in the engineered special-bar quality products and fabrication shipments. The company is also on track to complete its organic growth projects, like the capacity expansion of engineered special-bar-quality and the premium rail addition. Both of these initiatives would go a long way towards increasing its higher margin product mix and result in earnings growth.

Mesabi is expected to hit and maintain an annualized production rate of 360,000 tons (30,000 tons per month) by year-end. Next year’s performance is expected to improve further to an annualized rate of 400,000 tons to 450,000 tons (33,000 tons to 35,000 tons per month). Once the monthly production surpasses 30,000 tons, Mesabi is expected to break even and start generating profits by year-end.

The automotive market remains “strong” and this is something that all steel producers, even those that aren’t profitable right now, are banking on to work as a catalyst for their turnaround in the future. This is in addition to a sustainable recovery in residential construction, which, however, is expected to be dampened by a recent hike in mortgage rates.

On the back of a strong second quarter, Steel Dynamics still has positive cash flow, but this is something that it has to keep a close watch on. So far in the current year it has burned through $32.2 million in cash, implying it is consuming cash more than it is generating.

Steel Dynamics, Inc. (NASDAQ:STLD)’ mini-mills are more labor and energy efficient as compared to other integrated-steel companies. Also, it’s one of the best vertically integrated companies in the business. In addition, its mills are strategically placed in close proximity to both raw-material sources and consumers of finished goods, thereby offering cost advantages as far as transportation costs are concerned.

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