Electrical Steel And AI Demand Will Spur Market Expansion

Key Takeaways

• Strategic growth through acquisitions and market expansion in North America and Europe is expected to boost revenue and market share.
  
• Efficiency-driven transformation strategies and favorable market conditions could enhance operational margins and earnings.
  
• Economic uncertainties and declining shipments in key markets are challenging Worthington Steel's revenue growth and profitability.

Catalysts

Operates as a steel processor in North America.

• Worthington Steel is poised to benefit from increased demand in the electrical steel market due to AI initiatives, more data centers, and an anticipated annual power demand growth of more than 6% over the next 15 years, which should lead to higher revenues.
  
• Strategic investments and acquisitions, such as the expansion of electrical steel capabilities in Canada and Mexico and the expected closing on a 52% stake in the European company Sitem, are set to enhance market share and drive revenue growth.
  
• New automotive business wins, particularly in electrified vehicles, are expected to ramp up in the coming months, which can contribute to higher revenues and improved volume.
  
• The implementation of a transformation strategy aimed at improving business efficiency by reducing costs, streamlining processes, and optimizing efficiencies could lead to improved net margins.
  
• Anticipated market conditions, such as easing supply chains and expected reductions in interest rates, could bolster demand and operational margins in key markets like construction and automotive, potentially improving overall earnings.

Worthington Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Worthington Steel's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $175.2 million (and earnings per share of $3.47) by about April 2028, up from $108.2 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 12.3x on those 2028 earnings, up from 12.1x today. This future PE is lower than the current PE for the US Metals and Mining industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 0.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

Worthington Steel Future Earnings Per Share Growth

Risks

• Earnings and adjusted EBITDA significantly decreased compared to the previous year due to lower volumes and average selling prices, indicating potential challenges in maintaining revenue and overall profitability.
  
• Various markets, including automotive and construction, experienced shipment declines, impacted by uncertain macroeconomic conditions, which could hinder future revenue growth.
  
• The agriculture and heavy truck markets remain weak, further constraining revenue and earnings contributions from these sectors.
  
• Inventory holding losses and increased SG&A expenses negatively impacted earnings, affecting net margins and cash flow.
  
• Economic uncertainties, such as fluctuating demand in key markets and variable steel pricing, pose risks to future revenue consistency and market stability.

Valuation

• The analysts have a consensus price target of $34.0 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 2028, revenues will be $3.3 billion, earnings will come to $175.2 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 7.6%.
• Given the current share price of $25.75, the analyst price target of $34.0 is 24.3% 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.