Morningstar | Steel Dynamics Delivers Record 2Q Profits, but Market Conditions Unsustainable; Raising FVE to $34. See Updated Analyst Note from 24 Jul 2018
Steel Dynamics posted record second-quarter profits, with adjusted EBITDA rising 68% to $590 million. Higher profits were driven by a steep increase in shipment volume and significant metal margin expansion. With second-quarter volume higher than we anticipated for the flagship steelmaking segment, we've increased our near-term volume forecast. We now expect the company to deliver 8% growth in external shipment volume in 2018, driving higher near-term profits even though our margin outlook is effectively unchanged. In particular, long product volume has taken off, supported by a 23% decline in rebar imports year to date through the end of May versus the prior-year period. We've bumped up our 2018 adjusted EBITDA forecast to $2.2 billion from $2.0 billion, and our fair value estimate rises to $34 per share from $33. Our long-term outlook and no-moat rating are unchanged.Market conditions should remain conducive to elevated profits in the second half of the year, although we expect steel prices to soften modestly into year-end. Regardless, we believe share prices reflect more optimism than is warranted regarding the company's profitability beyond 2018. We don't believe the current spread between U.S. and world export prices, which has widened considerably in recent months, will prove sustainable. We forecast a 14% midcycle adjusted EBITDA margin, down significantly from 19% in the second quarter, but still safely above the trailing five-year average just shy of 12%. This long-term outlook reflects a material steel price decline and weaker metal margins, offset somewhat by higher capacity utilization stemming from a continuation of lower import volume. Regardless, we still forecast EBITDA declines each year over our five-year explicit forecast period, and we contend that investors will look back on 2018 as a cyclical peak.
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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