Schnitzer Steel enjoys strong quarter on strong domestic demand

Schnitzer Steel Industries, Inc. (NASDAQ:SCHN)

is a scrap steel manufacturing and recycling company based in Portland, Oregon. The company released its third quarter financial results on May 31, 2022.

MarketBeat.com - MarketBeatHighlights: -Results were better than expected as the company benefited from domestic non-ferrous sales.-Net income was $75 million, compared to $65 million in the third quarter of fiscal 2021, a share increased 15% to $2.52 from $2.16 in the same quarter last year. - Revenue increased to $1.010 billion from $821 million in the first quarter of 2021. - Acquisition of two full-service facilities, bringing total facilities to 24. - Processing 90,000 ferrous tons and 14 million pounds of non-ferrous metals in FY21. Domestic demand fell from 37% to 52% of sales for the quarter.

Schnitzer Steel continued to report mixed results in the all of its activities. The ferrous metals segment fell 7% year-on-year as market volatility weighed on results. On the other hand, non-ferrous metals continued to be in strong demand and segment revenues increased by 29% year-on-year. The main source of increased demand for the segment was the loosening of supply chains. In addition, ferrous and non-ferrous metal prices increased by 35% and 15% respectively. Finally, finished steel volumes were up 12% year-over-year, but up 27% sequentially as shipping delays increasingly began to ease. Prices were 41% for finished steel products. Meanwhile, utilization remained high at 96% for the year. Finally, SSI volumes for the quarter amounted to 1,129,000 LT.

Profit, Margin, Balance Sheet and Cash Flow:

Gross margins were flat year over year at 17.5%, and net income was also flat at 7.5%. Net revenue per ferrous ton increased from $54 per ton to $67 per ton. Operating profit was 9.7%. Operating cash flow for the quarter was $45 million and capital expenditures were $29 million. Total debt was $322 million and the debt ratio is currently 0.28.

Metals Market Outlook:

The metals market remains tense, despite the global macroeconomic context. Demand for recycled metals and scrap is expected to reach $368 billion by 2030, growing at a CAGR of 5.2%. China remains the largest producer of iron ore, with 1.3 billion metric tons per year and is unlikely to significantly increase its capacity. Demand is expected to be driven primarily by the developing market as more and more metal is used for everything from most consumer goods to infrastructure and more. Stronger demand pushed prices up to $600/tonne. Demand for metals remains strong due to the need for non-ferrous metals, while demand for ferrous metals remains less intensive. The critical source of demand remains mainly the energy transition industry. In addition, Asia continues to be the most important source of growth for the demand for metals. Management is looking to improve the throughput of higher value metals as it seeks to leverage demand for these metals from key industries. He has set a target of 5.3 million in revenue for FY23.

Global Headwinds:

China has recently been the largest consumer of steel and metals. Although the government has set lofty growth targets, analysts do not believe these targets are achievable without substantial stimulus. China continues to try to spend out of recession, which could be positive for the industry, but demand is still likely to be affected. The most important source of this sudden growth was the North American and European markets. Metal-intensive industries continue to demand at a prior rate, but are also rapidly slowing as capital-intensive sectors experience higher rate pullbacks.

Is the stock investable?

The stock is down 35% from its 52-week high and trading at a very low P/E of 4.5. Metal recycling is in a slow to low growth market, and investors are primarily concerned that prices will fall rapidly from their recent increases. Demand risks and a history of weak earnings continue to weigh on the stock. Current domestic demand may not last, and despite the low valuation, the market...