Acquisition Of Sitem Group Will Expand European Presence And Drive Growth In EV Market

Key Takeaways

• The acquisition of Sitem Group is set to boost Worthington Steel's Europe presence and electrical steel lamination business, supporting growth in the EV market.
  
• Continuous improvement and expansion into high-growth markets aim to enhance net margins and create new revenue streams.
  
• Lower volumes, pricing challenges, and automotive headwinds could pressure revenue, while increased costs and credit risks may impact margins and profitability.

Catalysts

Operates as a steel processor in North America.

• The acquisition of a 52% stake in Sitem Group is expected to expand Worthington Steel's presence in Europe and bolster its electrical steel lamination business, which could drive future revenue growth in the high-demand electric vehicle market by 2030.
  
• Implementation of continuous improvement strategies to reduce costs and increase efficiencies, such as reducing scrap and streamlining purchasing processes, can improve net margins by freeing capacity and lowering operational expenses.
  
• Expansion into high-growth markets through new product capabilities, like licensed ablation technology at TWB, is expected to fill the pipeline with new opportunities, potentially increasing future revenue streams.
  
• Anticipated regulatory changes in the heavy truck market could drive growth and increase volumes in the latter half of 2025, positively impacting earnings as new requirements boost demand.
  
• Optimism for stabilization in the automotive market, particularly with OEM partnerships and production ramp-ups, could alleviate current volume challenges, supporting future revenue and potentially improving net margins if growth materializes as expected.

Worthington Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Worthington Steel's revenue will decrease by -0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.6% in 3 years time.
• Analysts expect earnings to reach $178.8 million (and earnings per share of $3.54) by about December 2027, up from $143.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2027 earnings, up from 11.8x today. This future PE is lower than the current PE for the US Metals and Mining industry at 15.4x.
• Analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Worthington Steel Future Earnings Per Share Growth

Risks

• Lower volumes and lower average selling prices impacted earnings, which could continue to pressure revenue and net margins if these trends persist.
  
• Bad debt expenses increased due to a customer bankruptcy and additional reserves set aside, potentially signaling credit risks that could impact net earnings.
  
• Fluctuations in market pricing for hot-rolled coil could lead to minimal or even negative inventory holding gains, affecting gross margins and overall profitability.
  
• Automotive market headwinds from production cuts and inventory adjustments by major OEMs may persist, affecting revenue tied to this significant sector.
  
• High professional fees related to ongoing acquisitions like Sitem Group, along with increased SG&A costs, could weigh on operating margins in the near term.

Valuation

• The analysts have a consensus price target of $40.0 for Worthington 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 2027, revenues will be $3.2 billion, earnings will come to $178.8 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $34.1, the analyst's price target of $40.0 is 14.7% 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.