steel dynamics (STLD – Free Report) is one of the most followed stocks by Zacks.com visitors lately. As such, it might be a good idea to review some of the factors that could impact the stock’s near-term performance.
Shares of this steelmaker and metals recycler are up +8.3% over the past month versus the Zacks S&P 500 Composite, which was flat. The Zacks Steel – Producers industry, which includes Steel Dynamics, is up 8.7% over the period. The key question now is: Where could the stock head in the short term?
While news releases or rumors of a material change in a company’s business prospects will usually “trend” the stock and result in an immediate price change, there are always some basic facts that ultimately drive the buy-and-hold decision.
Revisions to earnings estimates
Here at Zacks, we prioritize evaluating the change in forecasting a company’s future earnings over anything else. That’s because we believe the present value of its future earnings streams determines the fair value of its stock.
Essentially, our analysis is based on how sell-side analysts who cover the stock revise their earnings estimates to reflect the latest business trends. As earnings estimates for a company increase, so does the fair value of its stock. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, causing its price to move higher. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, Steel Dynamics is expected to report earnings per share of $3.60, down -37.7% from the same quarter last year. The Zacks consensus estimate is up +2.8% over the last 30 days.
Consensus earnings estimate of $21.97 for the current fiscal year indicates a change of +36.5% year-on-year. That estimate has changed by +16.8% in the last 30 days.
For the next fiscal year, the consensus earnings estimate of $10.82 shows a change of -50.7% from what Steel Dynamics was supposed to report a year ago. Over the past month, the estimate has changed by +16.8%.
Our proprietary stock ranking tool, the Zacks Rank, has a strong, third-party audited track record and provides a more meaningful picture of a stock’s near-term price action by effectively harnessing the power of earnings estimate revisions. Steel Dynamics is ranked Zacks #1 (Strong Buy) based on the magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates.
The chart below shows the development of the company’s 12-month consensus EPS estimate:
12 Month EPS
Projected sales growth
As such, while earnings growth is arguably the best indicator of a company’s financial health, nothing happens when a company is unable to grow its earnings. After all, it’s nearly impossible for a company to grow its profits over a sustained period of time without increasing sales. Therefore, it is important to know a company’s potential revenue growth.
In the case of Steel Dynamics, the consensus estimate of revenue of $4.73 billion for the current quarter suggests a change of -10.9% year-on-year. The estimates of $22.17 billion and $16.08 billion for the current and next fiscal years indicate changes of +20.4% and -27.5%, respectively.
Latest reported results and surprise history
Steel Dynamics reported revenue of $5.65 billion for the most recent quarter, a +11.1% year-over-year change. EPS of $5.46 for the same period compared to $4.96 a year ago.
Compared to Zacks consensus estimate of $5.48 billion, reported earnings represent a +3.16% surprise. EPS surprise was +9.86%.
The company beat consensus estimates for earnings per share in each of the last four quarters. The company beat consensus sales estimates every time during this period.
No investment decision can be efficient without considering a stock’s valuation. When predicting the future price development of a stock, it is crucial to determine whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.
Comparing the current value of a company’s valuation multiples, such as B. Price to Earnings (P/E), Price to Sales (P/S), and Price to Cash Flow (P/CF), with its own historical values help determine whether the stock is Fairly Valued, Overvalued or Undervalued while making the comparison of the company relative to its peers based on these parameters gives a good indication of how reasonable the stock price is.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to rank stocks from A to F (an An is better than a B; a B is better than a C; etc.) is quite helpful in determining whether a stock is overvalued, correctly valued, or temporarily undervalued.
Steel Dynamics is rated B on this front, indicating it is trading at a discount to its peers. Click here to view the values of some of the assessment metrics that led to this grade.
The facts discussed here and plenty of other information on Zacks.com could help determine whether or not the market clamor surrounding Steel Dynamics is worth paying attention to. However, its No. 1 Zacks rank suggests it could outperform the broader market in the near term.