Morningstar | Steel Dynamics' 4Q Guidance Highlights no Impediments to Record Sales and Profits in 2018. See Updated Analyst Note from 18 Dec 2018
Steel Dynamics issued encouraging fourth-quarter guidance, as the company remains on track to deliver record profitability in 2018. Favorable market conditions facilitated this impressive performance. Year-to-date steel demand in the U.S. has grown at roughly 5%, an increase that continues the trend of steady demand growth in recent years. Year-to-date capacity utilization for the broader U.S. steel industry is slightly below 80%. Although this still sits well below historical averages from before the financial crisis, it marks a meaningful improvement from recent years. Import penetration has also moderated, with imports now accounting for less than 25% of U.S. steel consumption.These factors have set the stage for higher U.S. steel prices and significantly improved metal margins in 2018. Thanks to the company's consistent execution and limited reinvestment needs relative to peers, Steel Dynamics has been well-positioned to benefit from these favorable market conditions, delivering high profits and gaining market share.
Having updated our valuation model to reflect the company's fourth-quarter guidance, our $34 per share fair value estimate is unchanged. Our no-moat rating also remains intact. We forecast $2.1 billion of adjusted EBITDA on $12.0 billion of revenue in 2018. Over a longer-term horizon, however, we expect both revenue profits to decline materially. By 2022 (in a midcycle environment), we forecast adjusted EBITDA of only $1.3 billion on $9.1 billion of revenue. This translates to adjusted EBITDA margin contraction to 14.0% in 2022 from 17.4% in 2018. With shares having traded sharply lower since early October, we now view the stock as fairly valued.
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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