Philip Gibbs, a Vice President, Equity Research Analyst with KeyBanc Capital Markets, says the strong dollar has pushed a lot of U.S. steelmakers up the global cost curve and increased the amount of imports. Excluding energy, Gibbs believes the U.S. economy remains strong. Operating against what he calls an “extremely deflationary backdrop,” Gibbs says companies like Steel Dynamics, Inc. (STLD) have more variable cost structures and strong free cash flow.
“While hot-rolled coil prices in the U.S. have declined from $675 to $475, scrap prices have declined a nearly similar amount,” Gibbs says. “So from a spread — pricing less material costs — perspective, they have been relatively insulated and should see nice margin expansion in the event of steel pricing and volumes recover, each of which we are expecting in the second half of the year.”
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Gibbs says Steel Dynamics’ exposure to oil & gas is much less than a company like United States Steel Corporation (X). He says investors like the fact that Steel Dynamics has a good deal of exposure to nonresidential construction, so even in a weak steel price environment, they can generate a lot of free cash flow.
“Steel Dynamics right now is sporting a free cash flow yield on our 2015/2016 expectations of between 10% and 15%, which we think is pretty attractive,” Gibbs says. “More recently the company also enhanced its dividend, and right now they have about 3% yield. We think provides reasonable downside support amid a volatile market environment.”
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