Morningstar | Steel Dynamics' Margins Contracted in 2Q, Converging Toward Our Midcycle Forecast; $33 FVE Unchanged
Over the last couple years, we've anticipated lower margins for Steel Dynamics as U.S. metal margins contract. With 2018 cyclical peak market conditions now safely in the rear view mirror, the company's margin profile had softened and sits only just above our long-term outlook. Having updated our valuation model to reflect second-quarter results, our $33 per share fair value estimate and no-moat rating remain intact.Steel Dynamics generated a 13.2% adjusted EBITDA margin in the second quarter, down from 19.1% in the prior year period and 13.6% in the first quarter. We forecast just under 13% for 2019 and a midcycle (2023) level closer to 12.5%. Although the prospect of softer margins might seem concerning, we contend that this trajectory leaves the company at a healthy level of profitability overall and shouldn't preclude the generation of significant free cash flow. While our outlook for broader steel consumption growth in the U.S. is modest, we anticipate that Steel Dynamics will continue to capture market share. Toward this end, management has launched a series of reinvestment projects that will increase production capacity and further improve the company's competitive positioning versus peers.
For 2019, we forecast adjusted EBITDA just over $1.4 billion on $11.3 billion of revenue. Both of these figures sit above our midcycle estimates at the end of our five-year explicit forecast period. By 2023, we expect revenue to ultimately dip back below $10 billion on lower steel prices as EBITDA falls to $1.2 billion. Although our long-term steel price outlook might be bearish versus consensus, the market does not appear to be pricing in a material profit rebound for Steel Dynamics from current levels. Our fair value estimate sits slightly above current market prices, and we view shares 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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