Steel Dynamics Inc (STLD, Financial) recently experienced a daily gain of 2.28% and a three-month gain of 1.31%. With an Earnings Per Share (EPS) of 17.15, the question arises: is the stock fairly valued? We invite you to delve into the following analysis to gain insights into the company's valuation.
Introducing Steel Dynamics
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. The majority of its revenue is generated from the steel operations segment. As of September 20, 2023, Steel Dynamics (STLD, Financial) had a stock price of $101.55 and a GF Value estimation of fair value at $99.91.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the fair trading value of the stock.
According to the GF Value, Steel Dynamics (STLD, Financial) is considered fairly valued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. With a current price of $101.55 per share and a market cap of $16.80 billion, Steel Dynamics is believed to be fairly valued.
Given that 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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Assessing Financial Strength
Investing in companies with strong financial strength reduces the risk of permanent loss. The cash-to-debt ratio and interest coverage are valuable indicators of a company's financial strength. Steel Dynamics has a cash-to-debt ratio of 0.68, which ranks better than 62.44% of 591 companies in the Steel industry. The overall financial strength of Steel Dynamics is rated 8 out of 10, indicating strong financial health.
Evaluating Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Companies with high profit margins are usually safer investments than those with low profit margins. Steel Dynamics has been profitable 9 years 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 91.85% of 601 companies in the Steel industry. Overall, the profitability of Steel Dynamics is ranked 9 out of 10, indicating strong profitability.
Growth is a critical factor in a company's valuation. Research by GuruFocus 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 91.65% of 587 companies in the Steel industry. The 3-year average EBITDA growth rate is 70.6%, which ranks better than 89.02% of 510 companies in the Steel industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is an effective way to evaluate its profitability. 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. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Steel Dynamics's ROIC was 29.54 while its WACC came in at 11.85.
Conclusion
In summary, Steel Dynamics (STLD, Financial) is believed to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 89.02% of 510 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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