Enterprise Value = $749.09 million
Operating Income = $127.88 million
EV/Operating Income = 5.85x
Price/Revenue = .26x
Earnings Yield = 20%
Debt/Equity = 23%
Schnitzer Steel was established in 1906 as a scrap metal business by Sam Schnitzer. It has expanded to become one of the biggest recyclers of scrap metal in North America. Schnitzer acquires scrap metal via scrap cars, rail cars, appliances. Scrap metal is the raw input into electric arc furnaces. They currently operate 23 scrap metal facilities in the United States.
Schnitzer also produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar, and other specialty products.
The steel industry has been under pressure all year. With increasing steel tariffs, customers globally were in a rush early in 2018 to acquire steel in anticipation of the tariffs. Prices rose, benefitting the steel industry, and their subsequent decline has seriously hurt the industry. Making matters worse, recession jitters entered the picture, further hammering all of these stocks and sending them all into deep value territory. The market, in turn, has overreacted to what looks like a slight decline in steel prices.
Schnitzer, in particular, is affected by the steel tariffs in the US and abroad because their revenue is global. North America sales represent 39% of their business, and the rest is sold throughout the globe.
I don’t talk about price-to-book much, but I think it’s worth discussing for an extremely cyclical stock like Schnitzer. Schnitzer currently trades at 93% of book value. This is the same valuation that the company previously had in the depths of 2009. It was around the same valuation at the trough of steel prices in 2016. This looks to me like an overreaction and a mispriced security.
Schnitzer trades at a discount to its peers and its history. At 26% of sales and .93x book value, the company currently trades near the trough of steel prices, which occurred in 2016. This seems like a significant overreaction to a slight recent decline in prices since mid-2018. The current P/E is 5, and the forward P/E is 13. As recently as 2017, the P/E was 20.
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