Investments In Steel Fabrication And Automation Will Build Resilient Future

Key Takeaways

• Diversification into countercyclical markets and higher-margin products aims to enhance revenue resilience and net margins.
  
• Investments in automation and new processing capabilities are set to boost safety, efficiency, and earnings.
  
• Macroeconomic challenges and reduced demand are impacting various segments, suppressing revenue, net margins, and future profitability.

Catalysts

Processes, distributes, and stores metal products primarily in the United States, Canada, and Mexico.

• Olympic Steel's strategy to diversify into countercyclical steel-intensive end products and invest in higher-margin opportunities, such as flat-rolled coated products and expanded fabrication capabilities, is expected to drive future revenue and improve net margins through a more resilient business model.
  
• Investments in new equipment, automation, and processing capabilities are anticipated to enhance safety, efficiency, and productivity, which should positively impact future earnings and operational efficiency.
  
• The company's focus on reducing debt and maintaining a strong credit line ($304 million) provides financial flexibility to fund ongoing organic and acquisitive growth initiatives, which could bolster future earnings and shareholder value.
  
• Olympic Steel's pursuit of acquisitions, particularly in countercyclical markets and higher-margin fabrication businesses, aims to expand the company’s market position and diversify revenue streams, potentially enhancing both revenue growth and net profitability.
  
• Expected gains in market share for the Specialty Metals segment, facilitated by investments in new automated packaging and processing lines, may boost future sales volumes and margins, supporting earnings growth.

Olympic Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Olympic Steel's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $56.9 million (and earnings per share of $3.77) by about February 2028, up from $26.5 million 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 10.4x on those 2028 earnings, down from 14.3x today. This future PE is lower than the current PE for the US Metals and Mining industry at 19.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Olympic Steel Future Earnings Per Share Growth

Risks

• Challenging macroeconomic trends and lower OEM demand, especially in the heavy equipment sector, could continue to suppress revenues and net margins.
  
• Reduced demand led to carbon pricing pressures affecting both the carbon flat-rolled and pipe and tube segments, likely impacting revenue and net earnings negatively.
  
• Falling stainless steel surcharges create pricing pressure in the Specialty Metals segment, which could hinder revenue growth and net margins.
  
• The company reported a significant decrease in net income compared to the previous year, which may indicate potential risks to future profitability and earnings.
  
• Uncertainty in the political and macroeconomic environment could lead to ongoing demand softness, especially in industrial machinery and equipment, affecting future revenue streams.

Valuation

• The analysts have a consensus price target of $42.0 for Olympic Steel based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.2 billion, earnings will come to $56.9 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $34.02, the analyst price target of $42.0 is 19.0% higher.
  
• 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.