Morningstar | Schnitzer's Fiscal 1Q Guidance Sets the Stage for Lower Profits in 2019; Lowering Our FVE to $21
In light of Schnitzer's first-quarter guidance, we've softened our near-term profit outlook. Our fair value estimate falls to $21 per share from $22. Our fiscal 2019 adjusted EBITDA forecast falls to $147 million from $158 million, slightly below the consensus outlook. Our outlook for $2.26 billion of revenue implies a 6.5% adjusted EBITDA margin. This sits well below the 8.4% margin earned in fiscal 2018, a year the we believe will ultimately represent a cyclical peak for companies that operate within the broader U.S. steel supply chain. Our no-moat rating is unchanged.Although Schnitzer shares have moved sharply lower in the second half of calendar-year 2018, they continue to trade above our fair value estimate. We remain concerned that, over the long-run, margin contraction will take hold due to the combination of materially lower scrap prices and and tighter scrap flows. Our midcycle (2023) adjusted EBITDA margin forecast is just above 6%.
In the company's guidance release, management indicated that profits for the flagship Auto and Metals Recycling business will be lower than previously expected. This is primarily due to operating margin compression stemming from sharply lower prices for zorba and other nonferrous materials. For the Cascade Steel and Scrap segment, solid first-quarter results will be supported by materially higher steel prices versus the prior-year period.
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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