TimkenSteel a steal? 3 Steel Companies Compared

Published Thu, 08 Oct 2015 10:00 CET by DividendYields.org

Steel companies are facing challenges, given the declining steel prices and lower capacity utilization rates. However, companies with strong EBITDA and operating margins, manage to leverage their financial results, in spite of the volatility that is expected in the current market situation. Even better, as soon as the market conditions become favorable, these companies are likely to experience a sharp upturn.
This article discusses 3 steel and iron stocks with different market caps (a small-cap, a mid-cap and a large-cap). The average dividend yield is 3.6%, whereas the average payout ratio is 100% and the average beta is 1.52. Considering that the average payout ratio in the steel and iron industry is 304%, all three companies are financially strong and expected to continue delivering dividend payments going forward.

Nucor, Steel Dynamics and TimkenSteel Year-to-Date Stock Performance Graph
Nucor (NYSE: NUE), a Charlotte-based company that engages in the manufacture and sale of steel and steel products, both in the U.S. and internationally, has underperformed the market by 9.92% YTD. However, its low D/E ratio suggests effective debt management. Furthermore, Nucor’s operating margin (7%) is well above the industry average (3%). This is the outcome of the company’s variable compensation structure, which, unlike the fixed compensation structure employed by Nucor’s peers, enables increased productivity as a result of a motivated workforce. In addition, Nucor’s net debt to EBITDA ratio is 1.38 as of June 30, 2015. A further indication of the company’s financial strength is that fact that Nucor is the only U.S. steel company with an investment-grade credit rating. EPS growth is expected to be 35.5% through 2017, with an average EPS of $2.74, whereas average earnings growth is estimated at 15.1% annually.

Steel Dynamics (Nasdaq: STLD) is among the better performing steel companies with a YDT stock performance of 1.32%. Through its subsidiaries, the Indiana-based company operates in the manufacture and sale of steel products and recycled ferrous and non-ferrous metals, as well as in the fabrication and sale of steel decking products across the U.S. and internationally. Q2 2015 operating income growth was 26% ($31.6 million from $30.8 in Q1), whereas operating income per ton was $252, 30% higher than Q1. In addition, the company’s P/E is 40.38, far above the industry average P/E of 12.76. In spite of the company’s beta of 1.82, Steel Dynamics is considered a safe bet for dividend investors. Through 2017, analysts estimate an average EPS of $1.73, up by 284% compared to the current EPS of $0.45 and an average annual earnings growth of 16.3%.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Nucor 39.92 36.76 55.31 8.60% -27.82% 12.73 19.86 0.57 1.21 74%
Steel Dynamics 18.17 16.51 23.58 10.05% -22.94% 4.40 40.38 0.89 1.82 122%
TimkenSteel 14.01 9.95 44.15 40.80% -68.27% 0.62 25.94 0.24 n/a 104%

TimkenSteel (NYSE: TMST) is an Ohio-based company engaging in the manufacture and sale of alloy steel and carbon products to several diversified markets, including energy, automotive and construction, internationally. Following a spin-off from Timken Company on June 30, 2014, Timken transferred all of its assets and liabilities related to Timken’s steel business to TimkenSteel. TimkenSteel has sharply underperformed the market by 36.4% YTD, however it’s P/E of 25.94 is twice the industry average P/E of 12.76, suggesting strong investor confidence. In addition, TimkenSteel has a perfect D/E ratio as it has managed to lower its total debt by 10.2% in Q2 2015, down to $175 million from $195 million in Q1. The company estimates a debt to capital ratio close to 15.4%, in line with its debt projections. In regard to dividend payments, the company expects to maintain a strong dividend in the coming quarters. To that end, TimkenSteel’s management plans to further reduce its inventory (-17.2% in Q2 2015, down to 229.5 million) to free up more cash flows. For the next five years, analysts estimate an average earnings growth close to 3% annually.