Schnitzer: Strength in Steel
02/14/2017 8:00 am EST
The steel industry is garnering a lot of attention this year due to expectations of increased economic activity and the President's announcement that new oil and gas pipeline construction will be built with U.S.-manufactured steel, observes Crista Huff, editor of Cabot Undervalued Stocks Advisor.
I'm adding Schnitzer Steel Industries (SCHN) to the Buy Low Opportunities Portfolio. Schnitzer Steel is both a recycler of scrap metals, and a manufacturer of steel products that are used in nonresidential construction.
The company also owns over 50 stores that sell used auto parts. Schnitzer is based in Oregon and exports 60% of its steel products to international destinations. The company is run by a woman who has an investment banking background. Schnitzer is considered to be well managed and benefiting from a recent focus on cost cutting.
Schnitzer's full-year 2016 earnings per share were $0.48 (August year-end). Wall Street expects $1.21 and $1.48 EPS in fiscal 2017 and 2018, representing earnings growth of 152% and 22.3%. The corresponding P/Es are 19.6 and 16.0. The company's long-term debt-to-capitalization ratio is 27%, down from 32% three years ago. Schnitzer last announced a quarterly dividend increase in April of 2012. The current yield is 3.1%. The number of basic shares outstanding has been relatively unchanged over the last five years. 91% of those shares are held by financial institutions, which means that professional investors think that SCHN is a good investment.
However, please note that there are very few Wall Street analysts following the stock, so we could see big disparities between earnings estimates and actual quarterly results.
SCHN had a big run-up in 2016, which was actually a recovery from a drop in 2015, followed by a recent price correction in December and January. I expect SCHN to trade between $22.50 and $30 in the coming months. The stock has about 25% upside as it rebounds to its December high around $30.
By the time it gets there, I expect lots of profit-taking, so I would consider SCHN to be a shorter-term hold. The stock is low within that trading range, which is why I chose this moment to add it to the portfolio. Strong Buy.