Morningstar | Schnitzer Reports Middling 2Q Results; Trimming Our FVE to $19 On Modestly Lower Near-Term Profits. See Updated Analyst Note from 05 Apr 2019
Although Schnitzer Steel Industries' second-quarter recycling profits were steady, we've trimmed our near-term profit outlook for the company's steelmaking operations. Having updated our valuation model, we are lowering our fair value estimate to $19 per share from $20. Our no-moat rating is intact.Our adjusted EBITDA forecast falls to $140 million from $145 million in fiscal 2019 and to $123 million from $130 million in 2020. Although metal margins remain elevated versus historical levels, Schnitzer's second-quarter steel volumes were negatively affected by severe weather conditions in key markets. Most of these volumes will simply be pushed into the third quarter, as management guided to a 35% sequential increase in finished steel volumes. However, we believe the Cascade Steel and Scrap segment will be hard-pressed to restore the operating margins above the 9% watermark that it delivered in the two prior quarters.
We anticipate steady results from the auto and metals recycling segment through fiscal 2019 year-end, with operating margins between 5% and 6%. However, this would lock in unit profits well below the $39 per ton level to which the company had previously guided. Of course, that goal seemed far more realistic with the segment having reported profits of $46 per ton in 2018. We note that management also restored its prior guidance to total ferrous volumes of 5 million tons by fiscal 2021. With 2018 progress toward this goal having far exceeded the company's own expectations as well as ours, the timeline for this target had temporarily been moved up to 2020. We remain skeptical on this front, as we forecast volumes of only 4.75 million tons by the time our midcycle (2023) forecast kicks in. Should Schnitzer achieve its guidance, our margin outlook probably would also prove overly pessimistic due to operating leverage implications. Regardless, this would require 5% annual volume growth from 2018 amid a tepid environment for broader U.S. steel demand.
Schnitzer Steel Industries is engaged as a recycler of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. The company has two segments: Auto and Metals Recycling, which acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors and brokers, and procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores; and Cascade Steel and Scrap, which produces a range of finished steel long products using ferrous recycled scrap metal and other raw materials.
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