The Institutions May Cap Gains In Steel Dynamics

October 17, 2022 at 09:00 AM EDT

Steel Dynamics (NASDAQ: STLD) is expected to report a weak Q3 driven by slowing demand and falling prices but there is risk in the outlook. The company’s recent guidance suggests Q2 results could come in much closer to flat on a sequential basis than the -10% currently expected by the analysts. This situation has the stock set up to rocket higher but there is risk in this outlook as well. The institutions, which hold a substantial 80% of the stock, have been net sellers the last couple of quarters and capped gains in both calendar Q2 and calendar Q3. The first time was at $90, the second at $87, suggesting resistance is moving lower which is not a good sign for the bulls. If the institutions don’t see value in Steel Dynamics' future and keep selling the stock it won’t matter how good or bad Q3 is.

The Analysts Sentiment Firms For Steel Dynamics

The analysts are a mixed bag so take their rating with a grain of salt. The four analysts with current ratings, those less than 12 months old, have the stock pegged at Hold which is down from Moderate Buy on a YOY basis but firming in the very near term. The most recent commentaries came from Goldman Sachs and Citigroup and included one upgrade to Buy from Neutral and a new high analyst's price target. Goldman Sachs issued the upgrade citing the company’s earnings potential, the opportunity for free-cash-flow growth, and how that may lead to increased capital returns. Citigroup issued the high price target of $110 which is 20% above the consensus figure and 40% above the recent price action.

"Customer order entry activity continues to be healthy across all of our businesses, conflicting with the more pessimistic emotion in the marketplace," said CEO Mark D. Millett in the Q2 earnings report. "Despite softening flat roll steel pricing, our steel order activity remains solid from the automotive, construction, and industrial sectors, with energy continuing to improve. Our steel fabrication operations order backlog remains at near-record volumes and forward pricing levels. This combined with continued healthy order activity and broad customer optimism, supports strong overall demand dynamics for the construction industry.

Steel Dynamics Is A Dynamic Value With A Growing Yield

Steel Dynamics trades a significant discount to its closest competitor Reliance Steel and Aluminum (NASDAQ: RS) with a P/E of only 3.65X. This compares to 6.4X at Reliance and the dividends are very similar. Steel Dynamics is yielding about 1.75% compared to 1.95% at Reliance and both come with a robust outlook for dividend growth. In the case of Steel Dynamics, the company is paying only 5% of its earnings and has been growing the distribution for 9 years at a 15% CAGR. Reliance Steel was also downgraded by Goldman Sachs at the same time it upgraded Steel Dynamics and the reason was value.

Steel Dynamic’s balance sheet is incredibly healthy as well, allowing for record FCF in the most recently reported quarter, as well as share repurchases. The company generated $1 billion in FCF, paid $64 million in dividends, and spent $517 million on share repurchases. That’s worth about 3.5% of the shares outstanding at the time and this activity can be expected to continue. If so, it may sway the institutions back into buying the stock.

The Technical Outlook: Steel Dynamics Winds Up For Next Move

The price action in Steel Dynamics has been in a steady uptrend for years including the pandemic time period. The pandemic sell-off is a blip on the radar and now the stock is winding up for its next move. Based on the magnitude and time scale of this wind-up, it looks like it could lead to a big move. If the stock moves higher and breaks to a new high it could go up to the $110 level very easily. If not, the stock could fall back to the $50 level.

The Institutions May Cap Gains In Steel Dynamics