Morningstar | Schnitzer Steel Industries Closes Out an Impressive Fiscal 2018, but Shares Still Look Rich
Schnitzer Steel Industries' fiscal 2018 represented the company's third consecutive year of higher profits. The company benefited from an improved cost structure as well as the most favorable steel market conditions we've seen in many years. Accordingly, adjusted EBITDA grew 90% to $198 million from $105 million in the prior year. With our long-term outlook intact, our $22 per share fair value estimate and no-moat rating are unchanged.For a company that has struggled to generate attractive returns on invested capital in recent years, we applaud Schnitzer for delivering ROICs (excluding goodwill) above its cost of capital in fiscal 2018. This was made possible by wise strategic investments in recent years that have borne fruit amid better market conditions. We also note that the company's net debt to adjusted EBITDA now sits at only 0.5 times thanks to steady debt reductions since fiscal 2013.
Lower financial leverage will prove critical given that our base case outlook assumes a steady decline for both steel and scrap prices, as well as margin contraction, through our midcycle forecast. With our long-term outlook more bearish than consensus, we continue to view shares as modestly overvalued. This remains true even though Schnitzer's share prices has fallen to just over $25 per share from over $37 per share as recently as July.
For fiscal 2019, we forecast adjusted EBITDA of $158 million and earnings of $2.51 per share on $2.3 billion of revenue. These forecasts remain well above our midcycle (2023) expectations for adjusted EBITDA of $124 million and earnings of $1.49 per share on $1.9 billion of revenue.
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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