Worthington Industries (WOR 33.92, -2.74, -7.47%) traded sharply lower today after
reporting 2Q19 (Nov) earnings results this morning. WOR is primarily a steel
These companies do not make steel, rather they purchase large 20-ton coils from steel producers like AKS, NUE, MT, STLD, and X. Next they process the steel coils further to the precise type, thickness, length, width, shape, and surface quality required by customer specifications. These products cannot typically be supplied as efficiently by steel mills to the end-users of these products. So, steel processors like WOR fill this gap.
The majority of revenue comes from its Steel Processing unit while about half of segment revenue comes from the automotive market. Other key end markets include agricultural, appliance, construction, hardware, HVAC, lawn and garden, office equipment.
WOR also has a Pressure Cylinders operating segment which makes pressure cylinders, tanks, and various accessories. These include propane cylinders for barbequing, hand held torches etc. Worthington also has an Engineered Cabs segment which makes enclosed cabs where crane operators or farmers sit to operate that equipment.
Turning to its NovQ results, non-GAAP EPS was $0.58 while revenue rose 10.0% yr/yr to $958.2 mln. Both metrics were quite a bit below market expectations. The increase in revenue was primarily driven by higher average direct selling prices in Steel Processing, partially offset by lower sales in the consumer products business in Pressure Cylinders.
Steel Processing sales rose 18% yr/yr to $635 mln, driven primarily by higher selling prices. Pressure Cylinders sales fell 2% yr/yr to $294.4 mln, as consumer products in the prior year quarter benefited from hurricane-driven demand. Volume decreases in the industrial products and oil & gas equipment businesses were largely offset by favorable pricing and mix. Engineered Cabs sales fell 6% to $28.7 mln on lower volume.
WOR says it executed well in what was a challenging environment in NovQ. The company faced headwinds in the quarter due to rising input costs and lower spreads in its Steel Processing business. However, volumes for its key markets remained solid. Despite a challenging quarter, WOR says it's making good progress on recovering margins, and anticipates continued solid end market demand.
It has been a bit of a rough week for the steel stocks. Worthington missed expectations today. Last Friday, Nucor (NUE) guided below expectations for Q4 EPS and then Steel Dynamics (STLD) followed suit this morning with some downside guidance of its own. The theme from all of them sounds like demand is solid but higher costs are eating into EPS. This is a better alternative than it being driven by weak demand.
The steel stocks have been weak of late. US Steel (X) and Steel Dynamics (STLD) have been selling off over the past six weeks or so. Nucor (NUE) has held up better but it has also been weak. WOR is at new 52-week lows following this NovQ report.
While the tariffs have been good for steel selling prices generally, the weakness in the stock prices seems to be due to concerns over the impact the Chinese trade war is having with steel customers. While it's good for the steel producers that cheap Chinese imports are being slowed from US shores, a big trade war with China is not good for steel consumers. This may impact their results and they could cut back on production. As such, tariffs are a bit of a double-edged sword for the steel names.
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