Steel Dynamics Stock Price Down 12% in 2022 – Time to Buy STLD Stock?

Steel stocks were strong in 2021 and Nucor, which is the only steelmaker in the S&P 500 index, was among the top performers of the index. However, steel stocks have come off their highs and Steel Dynamics (STLD) is down 12% in 2022.

STLD stock is now down 26% from its 52-week highs and is in a bear market territory. Other steel stocks like U.S. Steel Corporation, Nucor, and Cleveland-Cliffs have also tumbled. What’s the forecast for STLD stock and is it a good buy now?

Steel Dynamics stock recent developments

Steel Dynamics released its fourth-quarter 2022 earnings yesterday. The earnings were a record on most of the key metrics. The company reported revenues of $5.3 billion in the fourth quarter, which were more than double of what it generated in the corresponding quarter last year. In the full year, it reported revenues of $18.4 billion, which were 92% higher than 2020.

The increase in revenues was driven by a mix of higher shipments and average selling prices. During the year, Steel Dynamics shipped 11.2 million tons of steel, which was again a record. It also has steel fabrication operations and shipped 789,000 tons of fabricated steel products in the year, another record.

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STLD reported record earnings

STLD reported a record operating income of $4.3 billion in 2021 while its free cash flows were $2.2 billion. The company has been using the cash both for investing in new plants as well as capital returns to stockholders. In 2021, it repurchased $1.1 billion worth of its shares, which accounted for 8% of its outstanding shares. Through share repurchases, companies can lower the outstanding share count, which leads to an increase in EPS.

Mark D. Millett, STLD CEO and chairman sounded optimistic on the earnings and outlook. He said, “The team delivered a tremendous operational and financial performance during 2021, achieving record net sales of $18.4 billion, operating income of $4.3 billion, and adjusted EBITDA of $4.6 billion.”

Steel Dynamics is bullish on the outlook

He said that steel demand was strong in 2021 led by strong demand from the construction, automotive and industrial sectors. Millet added, “Customer steel inventories also remained historically low, as steel supply was not sufficient to meet robust demand requirements during much of the year. This strong market environment drove significantly higher realized steel selling values, resulting in meaningful steel metal spread expansion.”

The company ended 2022 with a liquidity of $2.4 billion which looks quite healthy. Meanwhile, there are concerns that US steel prices might fall in 2022 after hitting a record in 2021. However, the continued demand growth and a reasonable level of imports would help support prices.

STLD expects demand growth in 2022

Steel Dynamics expects US steel demand to grow further in 2022. Millet said, “Based on domestic steel demand fundamentals and customer confidence, we believe North American steel consumption will experience steady growth, supported by the construction, automotive, and industrial sectors.”

The company is also constructive on the non-residential sector after the passage of the $1 trillion infrastructure bill. The non-residential sector is the biggest steel consumer. Steel Dynamics is expected to continue snatching market share from rivals as its Texas plant comes online in 2022. It expects the plant to ship around 2 million tons of steel this year.

Steel supply growth

Meanwhile, there are concerns that there could be a steel oversupply situation in the US amid the construction of new plants. Apart from Steel Dynamics, Nucor and U.S. Steel are also investing in new capacity. In 2019, Merrill Lynch issued a bearish note on US steel stocks citing structural oversupply. After Trump’s Section 232 tariffs, several US steel companies announced new plants which would lead to an increase in the country’s production capacity. However, fears or a massive oversupply turned out to be alarmist as some of the old capacity has also been shuttered.

Also, companies like Nucor and Steel Dynamics are better placed given their strong balance sheet and low operating leverage.

Steel Dynamics stock forecast

Wall Street analysts are reasonably bullish on Steel Dynamics stock and of the 14 analysts covering it 10 have a buy rating. Three analysts have a hold rating while one has a sell rating. Its median target price is $75 is which is a 37% upside over current prices. The stock trades 10% below the street low target price of $60 while the street high target price of $98 is an 80% premium.

STLD sock long term forecast

STLD’s long-term forecast looks positive as it commissions new capacity. The company has increased its market share considerably over the last decade. It is among the newest steel company in the US and has modern plants. Its variable cost structure and strong credit profile make it, along with Nucor, long-term winners in the steel industry.

Should you buy Steel Dynamics stock?

Steel Dynamics trades at an NTM (next-12 months) EV-to-EBITDA multiple of 2.6x. The multiples look attractive even as for commodity companies multiples are the lowest at the cyclical peak, as we currently have. However, what markets are underappreciating is the structural improvement in US steel companies’ earnings.

Looking at the charts, STLD is looking bearish though. It trades below the 50-day, 100-day, and 200-day SMA (simple moving average). Also, there has been a death cross formation in the stock after its 50-day SMA fell below the 200-day SMA. The stock might remain under pressure in the short term amid concerns over the sustainability of high US steel prices.

However, if you can be patient for the medium term, Steel Dynamics looks like a good buy. The steel supercycle is still far from over in the US and companies like STLD are the best ways to play the story.

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