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Morningstar | Steel Dynamics Delivers Record Profits in 2018 on Favorable Metal Spreads; Raising Our FVE to $35

In 2018, Steel Dynamics reported record profits thanks to favorable trade policy and near-record metal margins. While operating income reached an all-time high, the company also achieved record levels for steel shipments, steel fabrication shipments, net sales, and cash flow from operations. Having updated our valuation model, our fair value estimate rises to $35 per share from $34 due to the time value of money. Our no-moat rating is unchanged. Shares are trading closely in line with our fair value estimate, and the stock is 3-star-rated.

Although the fourth-quarter and full-year performance were both highly encouraging, we contend that current market conditions will ultimately represent a cyclical peak. We forecast materially lower steel prices and metal margin contraction over our five-year explicit forecast period. Additionally, capacity expansions from U.S. steelmakers set the stage for lower utilization if demand were to wane. For example, Steel Dynamics recently announced plans for a new flat-roll mill with capacity of 3 million tons per year that will be operational in 2021.

For 2018, Steel Dynamics reported adjusted EBITDA of $2.07 billion on $11.82 billion of revenue, a 17.5% margin. In 2019 we forecast adjusted EBITDA of $1.67 billion on $11.16 billion of revenue, a 15.0% margin. However, by the time midcycle market conditions are restored (2023 in our model), we forecast only a 13.5% adjusted EBITDA margin. To be fair, we note that this is roughly in line with the company's trailing five-year average.