Morningstar | Although Steelmaking Profits Softened, Steel Dynamics Issues Steady 1Q Results; $35 FVE Unchanged. See Updated Analyst Note from 22 Apr 2019
Steel Dynamics' first-quarter results were closely in line with the company's prior guidance. There were no major surprises, as steelmaking and recycling profits declined year on year while fabrication profits held steady. After updating our valuation model, our $35 per share fair value estimate and no-moat rating are unchanged.Companywide adjusted EBITDA fell modestly to $382 million from $400 million in the same period last year. For 2019, we forecast adjusted EBITDA of $1.70 billion on $11.58 billion of revenue, a 14.6% margin. We anticipate that profits will decline further over our five-year explicit forecast period amid metal margin contraction. Accordingly, our midcycle (2023) adjusted EBITDA forecast of $1.31 billion represents a negative 6% CAGR from our 2019 estimate. Regardless, even our 13.7% midcycle EBITDA margin forecast sits well above the company's trailing 10-year average of roughly 11%.
Like its U.S. steelmaking peers, Steel Dynamics has benefited from wider metal margins in recent quarters due, in large part, to higher prices from incremental trade protection. However, the company has also made impressive strides reducing its cost structure and maintaining high capacity utilization rates. Additionally, Steel Dynamics has reported attractive fabrication margins at a time when key competitors' fabrication operations have struggled. We reiterate our long-held exemplary stewardship rating, as the company's management team has grown the company's footprint without sacrificing efficiency along the way.
Shares are currently trading slightly below our fair value estimate but remain in 3-star territory. Accordingly, we don't see attractive risk-adjusted upside at the time being. However, given our positive outlook for future U.S. infrastructure spending, we'd highlight this best-in-class operator as an attractive long opportunity amid an unwarranted share price decline.
Steel Dynamics is a steel producer and metal recycler. The company manufactures and sells steel products, processes and sells recycled ferrous and nonferrous metals, and fabricates and sells steel joists and deck products. The company's segments are: Steel, which produces steel from ferrous scrap and scrap substitutes, utilizing casting, automated rolling mills and several downstream steel coating and bar processing lines, and Iron Dynamics; metals recycling, which involves the purchase, processing, and resale of ferrous and nonferrous scrap metals into reusable forms and grades; and steel fabrication, which produces steel building components, including steel joists, girders, trusses, and steel deck.
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