Schnitzer Steel (SCHN) is trading modestly higher today as it guided above expectations for Q3 (May). The company expects adjusted EPS of $0.58-0.62, a sequential improvement from the $0.48 result in Q2 (Feb). Like a few other steel names, SCHN does not guide when it reports earnings results; the company usually waits until later in the quarter -- or in this case, until after the quarter ended -- to provide insight into performance. Full MayQ results will be released on June 26 before the open.
Schnitzer operates two segments: Auto and Metals Recycling Business (AMR) and Cascade Steel and Scrap (CSS). The AMR segment is by far SCHN's larger segment. On the AMR side, the company expects to report operating income of $28-29 mln, up sequentially from $22 mln in Q2 (Feb).
It's always helpful to see how SCHN is doing on a per ton basis. Operating income per ferrous ton is expected to be $30-31, which is up from $25 in FebQ due to the benefit of higher volumes but lower on a yr/yr basis due to lower selling prices. On the CSS side, SCHN expects operating income to increase to $8 mln from $6 mln in FebQ.
While the stock is up nicely today on some solid EPS guidance, we want to put the brakes on the idea that this implies that the entire steel sector is doing better. Schnitzer Steel has "Steel" in its name, but it's 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 the automotive manufacturers. The other thing, and the more important thing, is that SCHN is more of a metals recycler than a steel producer. It does produce some steel, but it mostly buys/sells scrap steel and iron, largely from auto salvage yards, industrial manufacturers, and metals brokers. It then processes the scrap and either sells it to other steelmakers or uses it in its own steelmaking operations.
As such, while it's good news for SCHN to guide higher, we would not extrapolate that to the steel producers you're probably more familiar with (AKS, NUE, STLD, X), as their operations are different. Also, despite the good results in MayQ, SCHN's market remains difficult these days as scrap prices have been declining. This decline has taken a toll on the stock price, which has fallen from $35 a year ago to around $24 currently.
While the stock offers an attractive dividend yield of 3.2%, we would be cautious on the name until there is some sustained improvement in the scrap market and scrap prices start improving. The MayQ results are a hopeful sign, but we would like to see continued improvement later this summer and into the fall.