Did anyone catch those earning from Schnitzer Steel? They were HUGE, and stock down irrationally with steel group.
With companies around the world scrambling to reduce energy consumption to control costs, these are fortuitous times for companies with energy conservation as a core aspect of their business models. Enter the metal recyclers. With steel producers feeling the pinch from rising production costs even as demand continues to rise, those relying most heavily upon recycled metal as feedstock for production are finding the cost savings make them very competitive.
Oregon’s Schnitzer Steel (Nasdaq: SCHN) blew expectations out of the arc furnace yesterday when the company released earnings for the fiscal 2008 3rd quarter. Net income rose 46% from the prior year period to mark a new record at $62 million, or $2.14 per share. Revenue of $972 million was also unprecedented in the company’s 62-year history. Let’s look a little deeper into what’s making the company so profitable.
According to the Colorado School of Mines, producing steel from recycled metal yields a 74% savings of energy use as compared with the conventional process. Furthermore, the much-reduced need for raw materials like iron ore provides a major cost advantage during this global commodity boom.
As giant conventional producers like Korea’s POSCO (NYSE: PKX) and Luxembourg’s ArcelorMittal (NYSE: MT) pass their energy and raw material costs onto customers by raising steel prices, they actually serve to expand operating margins for lower-cost, recycling-focused producers like Schnitzer Steel and Nucor (NYSE: NUE). Schnitzer’s operating margin last quarter expanded to 10.5% from 9.8% in the prior year.
Schnitzer Steel is divided into three mutually beneficial business segments, each of which reported new revenue records for the quarter. The company claims to operate the only mini-mill in the Western U.S. that acquires all its recycled metals from an affiliated source. The third segment strikes this Fool as equally attractive in a challenging economic environment. Purchasing used and salvaged vehicles, the auto parts segment sells used parts through a nationwide retail network, and then sells much of the remaining metal to the recycling segment.
Although the company has less of a global operational footprint than competitors like Commercial Metals Company (NYSE: CMC) and Sims Group (NYSE: SMS), the bulk of recycled metals is exported to foreign markets. After searching for a steel company with the means to maintain margins in a rising cost environment, I believe the Foolish way for a steel company to win the global race for raw materials may be to avoid it altogether.