Upcoming Steel Coating Lines And Aluminum Shipments Will Strengthen Future Operations

Key Takeaways

• Strategic investments in circular technologies and new coating lines are set to improve margins through product diversification and cost savings.
  
• Infrastructure growth and Sinton's nearing capacity promise increased steel consumption and improved profitability, boosting future earnings.
  
• Lower steel prices and seasonal declines, along with import pressure and ongoing aluminum expenses, could hinder revenue growth and net earnings stability.

Catalysts

Operates as a steel producer and metal recycler in the United States.

• The ramp-up of new value-added flat-rolled steel coating lines is expected to provide an additional 1.1 million tons of higher-margin product diversification, which could improve future revenue and net margins.
  
• The Sinton team is nearing 90% capacity, and further improvements in production reliability and cost moderation are expected to lead to profitability in the near term, enhancing future earnings.
  
• Aluminum Dynamics cast its first aluminum ingot with commercial shipments beginning soon, projecting EBITDA positivity by the second half of 2025 and indicating significant future earnings growth.
  
• Positive expectations for infrastructure and manufacturing growth, supported by public funding and government acts, are anticipated to increase steel and steel joist consumption, driving future revenue growth.
  
• Strategic investments in circular and innovative technologies by the metals recycling team are set to enhance scrap separation, supporting increased recycled content in aluminum operations, leading to cost savings and improved net margins over time.

Steel Dynamics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Steel Dynamics's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $13.74) by about January 2028, up from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 12.6x today. This future PE is lower than the current PE for the US Metals and Mining industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 4.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Steel Dynamics Future Earnings Per Share Growth

Risks

• Risks include uncertainties related to the integration or startup of new assets, impacting operating income and returns on investment through potential delays or inefficiencies.
  
• Lower realized steel pricing and seasonal volume declines have already affected revenue, with potential future pricing and inventory challenges impacting net margins and earnings.
  
• Increased imports have maintained pressure on pricing, particularly for coated flat-rolled steel products, which could affect market share and decrease revenue if imports continue at current levels.
  
• Construction and ramp-up expenses for the aluminum operations are still ongoing, increasing SG&A and impacting net earnings until commercial viability is achieved around mid-2025.
  
• Macroeconomic and industry-specific risks like reliance on favorable trade case outcomes, fluctuating scrap prices, and broader economic conditions could hinder anticipated revenue growth and gross margins.

Valuation

• The analysts have a consensus price target of $138.53 for Steel Dynamics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $165.0, and the most bearish reporting a price target of just $106.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.4 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $127.05, the analyst's price target of $138.53 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.