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15

Commercial Metals earnings, and domestic steel market updates

June 20, 2008 – Comments (7) | RELATED TICKERS: CMC , USAP , RS

Last month I wrote about the pricing power many US based steel firms had. I also posted how the weak US dollar, and low inventory levels would lead to above average returns for my steel focus list. Here are those steel firms and their price increases since May 2:  [more]

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Available consumer dollars, and the flintstones

May 27, 2008 – Comments (9)

Available consumer dollars - ACD, is a measure of discretionary consumer spending.There are many moving parts, but almost all of these variables are moving in a negative direction when it comes to consumer spending, and more importantly, consumer discretionary spending. We will be analyzing the typical US family, the Flintstones.

I will be focusing on available consumer dollars - ACD. Lower take home wages, plus the  increases in all household expenses will cause a large fall in ACD over the next 12-24 months IMHO. Here are some of the variables that will effect ACD.  [more]

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22

ANWR, Peak oil theory, and oil economics - were are we going?

May 16, 2008 – Comments (22)

I just listened to the 100th brain-stem politician screaming about opening up ANWR for oil  development.  As an economist, and an energy user,  this is really starting to annoy me. These same fear mongers also claim that the US economy will crash due to the high cost of hydrocarbons. Actually I believe the opposite is true. The US oil fueled economy is old and tired IMHO. A new vibrant US economy is coming if we start real investing in all the oil alternative technologies.  [more]

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12

Steel Stocks: Update from latest earnings reports

May 01, 2008 – Comments (6) | RELATED TICKERS: USAP , RS , STLD


As the US economy continues to slow, the domestic steel industry continues to accelerate. My article on March 9th, gave investors a quick industry overview, and my steel stock focus list. After listening to the steel firms conference calls, and reading their earnings reports, I have changed my focus list, The two foreign companies: PKX and GGB, have been replaced with two domestics: GNA and STLD. My new focus list is:


GNA       Gerdau Ameristeel           Infrastructure, mining, commercial, rail
STLD      Steel Dynamics               Recycle, Infrastructure, fabrication
RS          Reliance Steel                Aerospace, fabrication, farm, wind power
CMC       Commercial Metals         Recycle,  infrastructure, Europe
IIIN          Insteel Industries            Concrete, Infrastructure, bridges
USAP:     Universal Stainless         Power generation, aerospace, oil/gas, tools


Several themes were emphasized during the conference calls, and earnings reports. These recurring themes lead me to be bullish on the domestic steel sector, even as the stock prices have risen. These themes are:

- Pricing power
- Capex
- Weak dollar
- Low inventories

Pricing power is very important for industries during all business cycles. As raw input costs rise, a firm must be able to pass these costs on to the end users. Without this power, margins get squeezed, and cash flows, profits decline. This margin squeeze effect is currently causing problems for many domestic industries such as: Housing, discretionary retailers, refiners, cement/aggregates, etc.

For the steel industry, pricing power remains strong, especially for the end demand steel users mentioned in my original steel article: Infrastructure, oil and gas, aerospace, recyclers. The above factors/themes are all interrelated. The weak US dollar is keeping foreign steel imports low, hence pricing strong. For 2008 new international iron ore contracts have just been set, 65% higher than last year. This is giving US recyclers huge pricing power.

In Commercial Metals latest conference call, management says "mills are running flat out". CMC also is raising its re-bar prices. International re-bar prices are averaging around 1,000 a metric ton, were as in the US, the price is still around 800. Today Universal Stainless just announced 5-7% increases on all tool products effective today! Its very simple - pay up or try and find a cheaper deal overseas - not a chance.

 Reliance Steel's CEO Dave Hannah stated "We passed the increase is on to our customers, as fast as or faster than we receive the higher cost material, leading to an increase in our gross profit margins" Keith Busse, CEO of Steel Dynamics said "Prices for both flat-rolled steel and scrap climbed faster and higher than we had anticipated, accelerating the margin growth we had predicted for the second quarter".

Another very positive sign for the domestic steel sector is that firms have continued to invest heavily in new high tech equipment, that reduces cost and increases productivity. Universal Stainless has invested 700,000 in its Dunkirk location. CEO Dennis Oates commented: "We expect to reduce the round bar production cycle in Dunkirk by as much as two weeks resulting in a payback that is less than one year." Reliance Steel invested 124M in state of the art equipment that management claims in its CC created market share gains.

The weak dollar was a consistent theme in ever conference call I listen to. While I do not think the US dollar will weaken much further, any level near our current level means international prices are higher then the current domestic prices. With high energy cost as well, imports are drying up, leaving the domestic steel firms to fill demand with much lower supply and competition. The only firm on my focus list that stated it may not be able to pass further input cost increases on, is Insteel Industries. IIIN is in the cement industry, which is having margins issues.

The low inventory levels at the service centers were also talked about in every conference call. While most executives did not know when these inventories will be filled again, they all acknowledged this gives the domestic steel firms solid pricing power for the rest of 2008.

My current favorites from my focus list would be Reliance Steel, Steel Dynamics, and Universal Stainless. Here are some bullet points for these three steely investments:

Reliance Steel
- Shortest lead time in industry, and with low inventories, a major advantage
- Farm gear, oil and gas have strong demand
- Continued improvement in our gross profit margins
- In January 2008, the Company repurchased 2,4M shares at $46.97 per share
- 1.60 is the estimated quarterly earnings per share, giving RS a PE of 9.5

Steel Dynamics
- Net income increased 40 percent and net sales more than doubled
- Second quarter backlogs for structural steel and merchant bars are strong
- Strong cash flow over 200 M in first quarter, with a 13% cash flow yield
- .90 is the estimated quarterly earnings per share, giving STLD a PE of 9.4

Universal Stainless
- Power generation and tool demand strong, with visibility out to 2010
- Only 5% international sales, just hired new marketing VP to increase this
- Backlog momentum increasing
- Oil and gas, especially deep water has huge potential
- Just increased pricing for tool products 6%
- .65 is the estimated quarterly earnings per share, giving USAP a PE of 14

Disclosure: Author currently owns stock in USAP and GNA, and has sold his position in IIIN




  [more]

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12

American Eagle's new flight pattern?

April 10, 2008 – Comments (9) | RELATED TICKERS: AEO , ARO

Over the past 10 years, the eagle has soared into the stratosphere. From about 1 dollar a share in 1997, American Eagle's stock price rose to over 30 in 2007. Like poor Icarus, who flew too close to the sun and ended up in the Icarian Sea, American Eagle's wings are now damaged, and its new flight pattern is unfortunately down.

American Eagle's new same stores sales were just released. Down 12% from last March. Total sales were down 2%. Ouch! But wait, the numbers get even worst. AEO is now lowering its earnings guidance to .18 -  .20 cent a share for the first quarter of 2008.  This is about 50% less than last year.  Also since last March, AEO has bought back about 8% of its outstanding shares, so actual net earnings will be down about 55% from last years Q1. Margins are obviously getting squeezed big time.

What should also concern investors is that just one month ago, AEO published an estimate of .26 cent a share for the first quarter. This new estimate is a 27% reduction from AEO's estimate form just 30 days ago. This calls into question whether upper management really knows what is happening on the ground.

This article from just a few day ago presents the bull case for American Eagle. The author did a great job of showing how well AEO has done in the past. The data shows AEO's remarkable growth from 1998 to 2006. But as stated above, American Eagle's stocks price had risen 30x during that time as well.

But one can not ignore the last 4 quarters when trying to predict future cash flows IMHO. Here is a chart of what I call earnings velocity. This is the past 4 quarters of AEO's net earnings year on year growth rates. I am including AEO's most recent estimate for Q1.  [more]

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