Steel Dynamics Inc (STLD, Financial) has experienced a daily gain of 2.5%, and a 3-month gain of 12.42%. The Earnings Per Share (EPS) stands at 17.15. The question we aim to answer is: is the stock Fairly Valued? Let's delve into a valuation analysis to uncover the answer.
Company Introduction
Steel Dynamics Inc operates scrap-based steel minimills with approximately 16 million tons of annual steel production capacity. The company's segments include steel operations, metals recycling operations, and steel fabrication operations, with the steel operations segment generating the majority of the revenue. The stock price currently stands at $106.82, with a GF Value, an estimation of fair value, of $100.64. Let's explore the company's value further.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. This is calculated based on three key factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, the GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
According to our valuation method, Steel Dynamics (STLD, Financial) is estimated to be fairly valued. The stock's fair value is based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. At its current price of $106.82 per share, Steel Dynamics has a market cap of $17.70 billion and the stock is estimated to be fairly valued. Because Steel Dynamics is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on the company's financial strength. Steel Dynamics has a cash-to-debt ratio of 0.68, which ranks better than 64.32% of companies in the Steel industry. Based on this, GuruFocus ranks Steel Dynamics's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Steel Dynamics has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $20.50 billion and Earnings Per Share (EPS) of $17.15. Its operating margin is 18.96%, which ranks better than 92.1% of companies in the Steel industry. Overall, GuruFocus ranks the profitability of Steel Dynamics at 9 out of 10, indicating strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Steel Dynamics is 36.5%, which ranks better than 91.61% of companies in the Steel industry. The 3-year average EBITDA growth rate is 70.6%, which ranks better than 89.35% of companies in the Steel industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Steel Dynamics's return on invested capital is 29.54, and its cost of capital is 11.59.
Conclusion
In conclusion, the stock of Steel Dynamics (STLD, Financial) is estimated to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 89.35% of companies in the Steel industry. To learn more about Steel Dynamics stock, you can check out its 30-Year Financials here.
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