Is Steel Dynamics a growth trap?

Value Investing Case Study 08-3: This is an updated analysis of Steel Dynamics incorporating the 2020 results. However, I have published it as a guest post in Value Investing Journey.

Contents

• Background

• Is Steel Dynamics a growth trap?

• Value Investing Journey

• CSC Steel

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

Background

In the 90s, I was the MD of Kanzen Testu, then the largest stainless steel pipe and fittings manufacturer in Malaysia.

At the juncture, I was a C-Suite executive of a Bursa Malaysian bedding/mattress group. The steel venture was a major diversification for the group where I was part of the team that project managed the steel venture start-up. 

The diversification was a success in the sense that within a few years of the start-up, the pipes and fittings business contributed a much larger revenue to the group compared to the bedding business.

At the time when the project was launched, there was already an established stainless steel pipe manufacturer in Malaysia.  We not only managed to take market share from them, but we also build up the exports.  

Within a year or two, the steel pipe export business was also much larger than the local sales.  I cannot remember the number specifically but the stainless-steel pipe exports increased to account for about 5 % to 6 % of the US stainless steel pipe consumption.

This of course caught the attention of the US stainless steel pipe manufactures who then filed an anti-dumping action against Malaysia. Technically it was against Kanzen as it was the only Malaysian exporter.

We challenged and won the anti-dumping case. There is even a Harvard Business Review case study on this. Refer to “Kanzen Berhad: The United States and Antidumping Duties”

I am familiar with the industry. Apart from visiting many pipe-making factories during the project study stage, I have been to many steel-making plants in China, Japan, and Korea. You get invited as a buyer of steel coils the basic raw material used in pipe making. And with the engineering background, I focussed all my time on the plants. 

To make the long story short, this is one of the reasons why I cover the steel sector with CSC Steel for Malaysia and Steel Dynamics for the US. 

Is Steel Dynamics a growth trap?

In the context of Steel Dynamics, I had several articles in my blog as well as in Seeking Alpha:

• Is Steel Dynamics a reverse value trap? (Part 1 of 2) 

• Is Steel Dynamics still a buying opportunity? (Part 2 of 2)

• Steel Dynamics: Wait For The Coming Price Decline (Seeking Alpha)

• Steel Dynamics: Still Not A Time To Buy (Seeking Alpha)

• Steel Dynamics: How To Flesh Out The Real Valuation Insights (Seeking Alpha)

If you are interested in investing in Steel Dynamics you should read all of them as they provide an in-depth analysis of the company and the industry.

I now have an update on Steel Dynamics taking into account the latest SEC Form 10k filings for 2020.

I first analyzed and valued Steel Dynamics in early Jan 2020. At that juncture, it was trading at USD 36.87 per share (as of 31 Dec 2020). The share price has since increased to USD 55.28 per share (as of 30 April 2021). 

This is about a 50% price increase over the past 4 months. My investment thesis then was that the stock was overpriced. So if you had ignored my analysis and bought Steel Dynamic, you would have made money. Wow.

In Q1 2021, the revenue and PAT of Steel Dynamics increased by about 38 % and 130 % respectively compared to those of the same period last year.  You may think that it is on a growth path.

Is Steel Dynamics a growth stock or a growth trap?

A growth trap is a stock that appears to be a good investment because there is reason to believe that it will grow over the next several years. The trap springs when the company is unable to live up to the market’s expectations.

 

I wanted to know whether I had made a mistake in my analysis. My approach was to first compare the business performance based on the updated financials. Next, I revalued Steel Dynamics using the same methodology as the last time. I then compared the results to see whether the conclusions would be different this round.  

However, instead of publishing the analysis as my blog post, I have it published in a US value investing blog called “Value Investing Journey”. 

To read the article, click Is Steel Dynamics a growth trap?

Value Investing Journey

I am forming a strategic alliance with Value Investing Journey to provide you with wider access to value investing materials.

Jason Rivera, the founder of Value Investing Journey had provided some feedback when I was starting my investment blog last year and we are now taking this to the next level. 

I also hope that this tie-up will help to expand Value Investing Journey’s presence in this part of the world.

CSC Steel

Steel is a globalized commodity. Product prices are determined very much by global prices. Even with protective trade measures, you cannot ignore global supply and demand.  You cannot look at the local market without understanding what is happening around the world. 

For those interested in CSC Steel, have a look at Steel Dynamics as it would give you a picture of what to expect.

I noticed that for the past few weeks my CSC Steel articles have been the top articles even though they were about 7 to 8 months old. Then I noticed that the stock price of CSC Steel has been trending up recently.  I will leave it to you to interpret the link between the increasing market price and the interests in the articles. 

Source: MalaysiaStockbiz

FYI, I had mentioned it to the blog subscribers earlier to give them some time advantage. I hope you will see this as another benefit of being a subscriber to the blog.

It would appear that assessing a stock is not so straightforward after all. If you are new to fundamental analysis, all this may prove very challenging.  

One way to overcome this is to complement your analysis with those of other experienced advisers. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.

END

Reading guide

If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation.  I suggest that you check up the Foundations series - Fundamentals 01,  Fundamentals 02, and Fundamentals 03.   I also have a Definitions page in case you are not familiar with the terms I have used. 

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Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.

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