Is Worthington Industries a growth trap? (Part 1 of 2)

Value Investing Case Study 16-1: I first covered Worthington Industries in Jun 2021 in Seeking Alpha based on relative fundamental analysis. This post analyses the company following my normal approach.

Is Worthington Industries a growth trap?

As of 4 Jun 2021, Worthington Industries Inc (WOR or the Group) was trading at USD 66.10 per share compared to its Book Value of USD 25.16 per share (as of 28 Feb 2021). 

This is equal to a Price to Book of 2.6. Compare this to the steel industry Price Book multiple of 1.6. (Source: Damodaran Jan 2021). A high Price Book ratio is commonly associated with a growth stock. 

Over the past decade, WOR only achieved a CARG of 4.6 %. This is not a sign of a growth stock.

Is it a growth trap then?  A growth trap is a stock that appears to have strong growth potential. But the strong growth is illusory.

For the 9 months ended Feb 2021, the Group achieved USD 57 million operating income compared to USD 16 million for the same period last year. Is the market merely looking at this and concluding that it is a growth stock?

To determine whether a company is a growth stock you need to dig deeper. Looking at metrics superficially can be misleading.

Join me in a 2-part series as I argue why WOR is not a growth stock.

Part 1 is presented here while Part 2 will be published in 2 weeks’ time.

Should you go and short the stock? Well, read my Disclaimer.


  • Is there Anything Special about the Group’s Expertise?
  • Is there Concern about how it Uses its Funds?
  • Is the Current Performance Outstanding?
  • Tracing the Group’s Rich and Unique History
  • Is there a Great Future?
  • Pulling it all together
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WOR expertise

Is there Anything Special about the Group’s Expertise?

WOR was founded in 1955 by John McConnell, a young steel salesman who saw an opportunity for custom-processed steel.  

Under McConnell’s guidance, WOR grew into a $3 billion global organization. It is often recognized for its employee-based philosophy. WOR has been named one of the best companies to work for in America.

The Group made its IPO in 1968 and moved to the NYSE in 2000. 

In 1996, John McConnell’s son, also named John, took over as chairman and CEO. He had worked for the Group for more than 20 years. He started as a general labourer and later advanced to sales, operations, and personnel.

WOR is today a global, diversified, metal manufacturing company. Some of the Group’s accolades included:
  • WOR is currently the leading global supplier of pressure tanks and cylinders. It manufactured more than 90 million cylinders and accessories for markets in more than 70 countries.
  • WOR processed 7.5 million tons of steel and is currently the largest purchaser of steel in the United States behind automakers.

The Group today has 2 major business segments:
  • Steel Processing. This operates 8 manufacturing units and 4 consolidated joint ventures.  This segment served 800 customers and accounted for about 61 % of the Group revenue in FYE 2020.  WOR is one of the largest intermediate processors of flat-rolled steel in the US.
  • Pressure Cylinders that operate 16 manufacturing units. This segment served 3,700 customers in FYE 2020. WOR produces both low-pressure and high-pressure cylinders. WOR believes it has the largest market share in low-pressure cylinders in the US and Canada.

The Group also has 5 unconsolidated joint ventures. In the FYE 2020, the US accounted for about 93 % of the Group revenue with the balance mainly from customers in Europe.

Is there Concern about how it Uses its Funds?

As of the end of Feb 2021, the Group had a Total Capital Employed (TCE) of USD 2.2 billion. Shareholder’s fund accounted for 59 % of the TCE with 34 % balance from debt (including leases).

This is equivalent to a book debt to TCE ratio of 34 % compared to the US steel industry average of 44 % (Industry source: Damodaran Jan 2021). 



USD million

Shareholders’ Equity



Minority Interests



Total Debt and Lease     








USD million

Net Operating Assets

Net OA


Net Financial Assets

Net FA


Non-Operating Assets






Table 1: Sources and Uses of Funds - 3rd Quarter Feb 2021

About 61% of the TCE has been deployed for the operations with the balance tied up mainly in cash.

Its debt to TCE is below the industry level.  But the Group’s cash position looks high as its cash to firm value is 29 % compared to the steel industry average of 11 % (Source: Damodaran Jan 2021).

WOR Capital and its deployment
Chart 1: Sources and Uses of Funds

The Group did not provide any breakdown of how its funds have been deployed by segments.  

However, you can get a picture by looking at how the Total Assets have been deployed.
  • The Steel Processing segment accounted for about 33 % of the Total Assets.
  • The Pressure Cylinders segment accounted for 37 % of the Total Assets. Note that a large part of these Total Assets is in the form of Goodwill. 

  • The Others including Cash together accounted for the balance of 30 %.
WOR total assets by segments
Chart 2: Total Assets by Segments

Is the Current Performance Outstanding?

For the 9 months ended Feb 2021, the Group achieved USD 2.2 billion of revenue with USD 57 million operating income. For the same period last year, the Group achieved revenue of USD 2.4 billion with USD 16.1 million operating income. 

The improvement in the operating income was due mainly to the following:
  • USD 37.1 million inventory gain due to the increase in steel prices in the 3rd quarter of FYE 2021 over inventory holding losses in the prior year.
  • USD 7.8 million decreases in impairment and restructuring charges partially offset by USD 6.0 million increase in SGA and profit-sharing.

I do not see the inventory gain as sustainable. 

At the same time, the Group recognized USD 655.5 million gain from the sale of its investment in a company that went public. This is a one-off gain from the sale of its investment.

The current YTD performance is in contrast to the long-term trend in the business as shown in the Performance Index chart below.

WOR Performance Index
Chart 3: Performance Index

As can be seen, revenue has improved since 2010. However, gross profitability has not shown any improvement since 2010. 

Net income had some wild swings. It increased significantly in 2011 and 2017. However, this is since declined so that in 2020 it was 64 % higher than that of 2010.
  • The jump in earnings in 2011 was due to the acquisition of Gibraltar Steel in 2010.
  • The decline in the 2015 earnings was due to the USD 86.1 million impairment charges. This was following the closure of its Engineered Cab facility in Florence, South Carolina.
  • The jump in earnings in 2017 was driven mainly by improved steel prices and contribution from the consolidation of a steel joint venture.
  • 2020 performance was impacted by the USD 92.7 million impairment charges and the Covid-19 pandemic. 

An analysis of the performance of the 2 segments showed:
  • The Steel Processing segment is the largest contributor in terms of revenue, operating income, and Return on Assets.
  • The Pressure Cylinders segment employed about 14 % more total assets than the Steel Processing segment. But its Return on Assets is about 1/3 that of the Steel Processing segment.
  • There were 2 discontinued segments that accounted for a large part of the revenue and operating income under Others.
    • The Engineered Cab segment operated from 2012 till 2018.
    • The Metal Framing segment operated from 2010 to 2012.
WOR segment performance
Table 2: Segment performance
(a) About USD 301 million of the Total Assets of the Pressure Cylinders segment was in the form of Goodwill.
(b) Cash accounted for the majority of the Total Assets in 2020.
(c) Return on Assets defined as average Operating income divided by 2020 Total Assets.

Tracing the Group’s Rich and Unique History

Over the past 11 years, the revenue of the Group had grown from USD 1.9 billion in 2010 to 3.1 billion in 2020 equivalent to a CAGR of 4.6 %. This was driven by both the Steel Processing and Pressure Cylinders segments. In turn, there was significant growth through acquisitions.

The Steel Processing segment accounted for about 51 % of the Group revenue in 2010 but in 2020 it has grown to 61 % of the Group revenue.  This was driven by a CAGR in revenue of 6.5 %.
  • Steel consumption in the US increased from 79.9 million tons in 2010 to 97.7 million tons in 2019 equivalent to a CAGR of 2.3 %. In contrast, WOR grew its steel shipments by a CAGR of 6.8 % from 2.1 tons in 2010 to 3.8 tons in 2019.
  • Effectively, WOR's market share increased over the period. Of course, WOR only had a very small share of the US steel market. 

The Pressure Cylinders segment had grown from 24 % of the Group revenue in 2010 to about 38 % in 2020. This was equal to a 9.4 % CAGR. 
  • In terms of total numbers of units shipped, the segment shipment increased from 55.4 million units in 2010 to 82.52 million units in 2020. This was equivalent to a 4.1 % CAGR. 
  • To reconcile this with the dollar revenue, there must have been an increase in the average selling price per unit.

Apart from Steel Processing and Pressure Cylinders, the Group actually had 2 other operating segments over the past 11 years. 
  • In 2011, the Group contributed certain of its Metal Framing segment assets to an unconsolidated joint venture. It then ceased the operations in all the other facilities. The financial performance of the Metal Framing segment was then reported under Others from 2012 onwards.
  • It has acquired and then a few years later de-consolidated the Engineered Cab segment in 2019 when it ceased to be the controlling party.

You can see how the profile of the business has changed over the past 11 years from the chart below.

WOR revenue by segment
Chart 4: Revenue by segment

The growth of the Group appeared to be driven by acquisitions, joint ventures, closure of business, and divestments. These corporate activities appeared to be annual activities.

I have already mentioned the closure of the Metal Framing and the deconsolidation of the Engineered Cab segments. 

Over the past 11 years, the Pressure Cylinders segment outspent the Steel Processing segment by about 5 to 6 times in terms of acquisitions. The major expenditures (> 10 USD million) were as follows.

Steel Processing

The major acquisitions by this segment included:
  • The steel processing assets of Gibraltar Industries Inc for USD 29.1 million in 2010.
  • Additional 10% interest in TWB Company for USD 17.9 million in 2013.
  • The assets of Rome Strip Company Inc for USD 54.5 million in 2015.
  • The operating net assets, excluding working capital, related to Heidtman Steel Products Inc for USD 29.6 million in 2019.

Pressure Cylinders

The major acquisitions by this segment included:
  • The assets of Hy Mark Cylinders Inc for USD 12.1 million in 2010.
  • 60 % interest in Nitin Cylinders Ltd for USD 21.1 million in 2010.  It went on to buy all the net assets for USD 41 million in 2011.
  • The assets of BenzOmatic for USD 51 million in 2011.
  • The propane fuel cylinder business of The Coleman Company for USD 22.7 million in 2011.
  • 100 % of the outstanding shares of Westerman for USD 62.7 million cash and the assumption of USD 7.3 million of debt.
  • The business of Palmer Mfg & Tank for USD 113.5 million cash in 2013.
  • The tank manufacturing business of Steffes Corp for USD 28.9 million in 2014.
  • 75 % interest in Worthington Aritas for USD 35.3 million in 2014.
  • The assets of Midstream Equipment Fabrication for USD 38.4 million in 2014.
  • 79.59 % interest in dHybrid Systems, LLC for USD 15.9 million in 2014.
  • The global CyroScience business of Taylor Wharton for USD 30.6 million in 2015.
  • All the equity interest in AMTROL for USD 283.0 million in 2017.
  • The net assets of Magna Industries Inc for USD 13.5 million in 2019.

Note that due to the larger amount spent on acquisitions, the Pressure Cylinders segment accounted for 94 % of the Group 2020 Goodwill.


In 2008, the Group initiated a Transformation Plan.  The goal was to improve sustainable earnings potential, asset utilization, and operational performance. The plan focused on cost reduction, margin expansion, and organizational capability improvements.

As of 2014, the Group had recognized USD 74.3 million of total net restructuring charges associated with the Transformation Plan.

In 2015, the Group stated that the “next iteration of Transformation is to accelerate our progress using Lean.”  This was launched as Transformation 2.0 in 2019.

What are the results of this Transformation Plan?
  • As can be seen from the chart below, the profit margins for the Pressure Cylinder segment have been declining over the past decade.
  • On the other hand, the Steel Processing segment had been able to hold onto its margins in the first half of the decade. After peaking in 2017, it had declined to be below its 2010 level.
WOR segment margins
Chart 5: Segment margins

You could argue that without the Transformation Plan, the results would be worse. I would reserve judgment on the effectiveness of this Plan until I have compared WOR's performance with those of its peers.

WOR future

Is there a Great Future?

WOR operates in two major sectors - steel and pressure cylinders.

The steel sector is characterized as follows
  • Steel products are commodities.
  • The industry is cyclical.
  • Its profitability is very dependent on government trade policies.

Steel consumption in the US increased from 79.9 million tons in 2010 to 97.7 million tons in 2019 equivalent to a CAGR of 2.3 %.

Industry growth would come from either increased consumption in the US and/or reduced imports.

The positive news is that the current level of steel consumption in the US is below the long-term average. If the Biden administration focuses on infrastructure, there would be prospects of increased steel demand.

In terms of imports, there has been a decline in imports due to the various trade barriers instituted.

I have an analysis of the steel sector in my earlier post of Steel Dynamics. Refer to “Is Steel Dynamics a reverse value trap? (Part 1 of 2).”

Pressure Cylinders

WOR operates in both the high-pressure and low-pressure cylinders market.
  • WOR believes that it has the largest domestic market share in the low-pressure cylinder market.
  • WOR has one principal domestic competitor in the high-pressure cylinder market. However, the Group did not provide any indication of its market share in this segment.

WOR market share provides some evidence that it has some moat for this segment.

WOR did not provide a breakdown of its sales in terms of the high-pressure or low-pressure cylinders. Rather it is broken down into:
  • Consumer products - 42 % of total segment revenue in 2020. It is likely that the bulk of the low-pressure cylinders fall into this category.
  • Industrial products - 48 % of total segment revenue in 2020. It is likely that the bulk of the high-pressure cylinders fall into this category. 
  • Oil & gas equipment - the balance.

There is still global demand for pressure cylinders as can be seen from the illustrations below.

Gas cylinder market
Chart 6: Global gas cylinder market   Source: Data Bridge Market Research

"The global gas cylinder market (both high pressure and low pressure) is expected to grow at a CAGR of 8.7% over the forecast period 2020 to 2027.  Asia Pacific region dominated the global market in 2019.  The region is also projected to maintain its dominance over the same period. The region is also expected to register the fastest growth with maximum CAGR over the estimated timeframe from 2020 to 2027." Acumen Research Consulting.

In the high-pressure cylinder market, the chart below shows that the US dominates the global market.  Note that this accounted for the bigger portion of WOR Pressure Cylinders segment revenue.

High pressure cylinder market
Chart 6: High-pressure cylinder market   Source: Cognitive Market Research

The global high-pressure gas cylinder market is forecast to reach $2.3 billion by 2025 with a CAGR of 3.8% from 2020 to 2025. 

According to Research and Markets, the major drivers for this market are 
  • The increasing demand for CNG vehicles.
  • The growing usage of high-pressure cylinders in the medical and fire protection industries. 

Based on the above market research reports, I would conclude that the Pressure Cylinder sector is not a sunset sector. While it may not experience double digits growth in the US, there are international expansion opportunities for WOR.  

Pulling it all together

Over the past 11 years, WOR revenue had grown by a 4.6 % CAGR. This came from growth in the Steel Processing and Pressure Cylinders segments.  And this is despite the deconsolidation of the Metal Framing and Engineered Cab segments.

I have not been able to break down the growth (both revenue and earnings) into those due to organic growth and those due to acquisitions. Acquisitions and closure/divestments appear to be an annual activity. As such I would consider them as part and parcel of the Group operations.

Partly because of these acquisitions and divestments, the earnings of the Group have been very volatile. In 2017, the net income was 4.2 times that of 2010. But then in 2020, it declined to just 1.6 times that of 2010.

On a CAGR basis, net income grew at 5.1 % from 2010 to 2020. Together with the 4.6 % CAGR in revenue for the same period, I do not see WOR as a growth stock.

But if WOR is not a growth stock, why is the Price to Book multiple so high?  It is even higher than the industry average.

For a definitive answer, you need to also consider its intrinsic value. You also need to look at whether the multiple has been boosted by an aggressive share repurchase plan.

Join me in part 2 of the analysis as I explore these issues.

As you can see, fundamental analysis is more than just using some formula. So, if you are just starting out to analyze and value companies, it may be helpful to supplement it with third-party analyses and valuation. 

There are several financial advisers who provide such analyses. 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 of Part 1 of 2

Part 2 of 2 will be published on 18 Jul 2021

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