Schnitzer Steel (SCHN 23.07, -0.04, -0.17%) is trading higher today after reporting
better-than-expected 1Q19 (Nov) results this morning. Schnitzer Steel is a bit
different than most other steel producers. For one thing, it's based in
Portland, OR while most steelmakers are in the Midwest, near automotive
SCHN also differs because it is more of a metals recycler than a steel producer. It buys scrap steel and iron mostly from auto salvage yards, industrial manufacturers, and metals brokers. It then processes the scrap and sells it to other steelmakers so they can make steel or SCHN uses it in its own steelmaking operations.
Schnitzer operates two segments: Auto and Metals Recycling Business (AMR) and Cascade Steel and Scrap (CSS). Its AMR segment is by far SCHN's larger segment. About 60% of segment revenue is ferrous (steel, carbon steel, stainless steel) sales and 30% is non-ferrous (aluminum, brass, copper, nickel) sales. The remaining 10% is other sales. Its CSS segment represents 20-25% of revenue and it includes steel production facilities that make rebar and wire rod for construction purposes. In FY17, the company integrated its SMB segment with AMR's Oregon metals recycling operations, forming a new division, Cascade Steel and Scrap (CSS).
Turning to the NovQ results, non-GAAP EPS fell 8% yr/yr to $0.58, but that was a bit better than market expectations. Revenue rose 16.8% yr/yr to $564 mln, which also was above market expectations. In challenging market conditions that saw a significant decline in selling prices for nonferrous products, its AMR segment delivered solid operating performance with significant improvement in ferrous and nonferrous volumes. Its CSS segment benefitted from significant operating margin expansion through higher steel prices and improved productivity.
Investors seem to be pretty pleased with the NovQ results. The stock has been under pressure since early July, going from $38 to close around $23 yesterday. It has also been weak the past couple of weeks which suggests that investor expectations were not very high. SCHN seems to have exceeded those expectations.
Its nonferrous business is under pressure these days as prices have fallen sharply. Average nonferrous selling prices decreased 19% yr/yr and 14% sequentially. Investors are going to want to see nonferrous prices at least stabilize and hopefully show some improvement in calendar 2019 before the stock gets back on the upswing.
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