What the Steel Players Have to Say Now

Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Steel players have seen their stock prices plummeting since June 17. The sharp decline in prices has not come without a reason; it has been the market’s reaction to the poor earnings pre-announcement by the steel companies for the second quarter.

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For those who don’t follow steel players regularly, an earnings pre-announcement might seem like an awkward idea. However, this has remained a norm in the steel industry and has been a more powerful stock-price catalyst as compared to the actual earnings announcement. So what did the steel players have to say?

Nucor kicked off on a bad note

Nucor (NYSE: NUE) kicked off the 2Q earnings pre-announcement season with a soft mid-quarter update, indicating it expects 2Q operating EPS of between $0.25 and $0.30 vs. consensus of $0.39.

Nucor indicated performance in its upstream steel mills is down with weaker performance in sheet and structural steel. On a positive note, downstream segment results (Nucor’s fabricated construction-products businesses and raw materials) are expected to improve sequentially after the seasonal slowdown and outage at the Trinidad DRI facility, both of which occurred in 1Q. Nucor did flag that in 2013 non-residential construction markets continue to lack sustained momentum, but are slowly improving from historically low levels.

Nucor’s 2Q guidance suggests the potential for more downside than upside for 2013 even in a slow recovery scenario. Thus far there has been limited follow through in the form of meaningful results for the steel producers, including Nucor, despite the encouraging signs earlier this year of improving construction-related demand. Instead lead times, prices, and margins remain relatively stagnant while 2H’13 earnings estimates still reflect expectations of a meaningful recovery.

What AK Steel had to say

AK Steel (NYSE: AKS) has seen the largest decline by far in this period. This is understandable given the large disparity between what the market was forecasting and what the company estimates that it earned in the quarter. AK Steel indicated it expects to report a loss of $0.33 per share to a loss of $0.38 per share in Q2’13, vs. the consensus of a loss of $0.08 per share only. Included in the expected Q2 loss range is a non-cash tax income tax expense of $11 million, or $0.08 per share, vs. the Street’s tax benefit estimate of $11 million (that is not a typo, the Street was estimating it to be a benefit whereas it turned out to be an expense).

Looking ahead, the combination of lower maintenance outage costs, declining raw-material costs (i.e., iron ore), and recent improvements in spot prices each suggest results should improve nicely in the coming quarters. As a result, the forward-looking estimates still appear reasonable, particularly relative to some of the steel peers.

Steel Dynamics blames weak pricing for the miss

Steel Dynamics (NASDAQ: STLD) concluded quarterly pre-announcement season for the steel producers with a disappointment, indicating it expects to earn between $0.10 and $0.14 per share in Q2 vs. consensus of $0.23. Steel Dynamics indicated it expected Q2'13 shipments to be slighter higher sequentially.

However, weak pricing in sheet and structural steel will more than offset the volume improvement, resulting in reduced earnings for the company’s steel operations. Also, the company expects weaker results in its metals recycling business and expects its fabrication operations to remain profitable in 2Q.

Steel Dynamics indicated that uncertainty in the domestic economic environment continues to suppress consumer confidence and customer buying. Steel Dynamics flagged that the "residential construction market is stronger, and market optimism remains in place for improvement in non-residential construction demand." Although once again the optimism on construction demand was due to "modest increases in key directional indices" rather than substantive indications of improving company-specific order books.

Final word

The recent round of announcements related to performance in the second quarter suggests that a recovery in the steel sector remains far from reality. Even, improvement in construction demand hasn’t been able to turn the tables for this sector that, for long, has seen its profitability being plagued by the overwhelming issue of overcapacity. Among the names in the industry, AK Steel looks the best given its overdone sell-off and modest future estimates.

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Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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