Schnitzer Steel Industries SCHN reported fourth-quarter earnings per share of $0.03, a steep decline from $0.32 per share last quarter and $0.40 per share during the same period a year ago. Although all three business units (metal recycling, auto parts, and steel manufacturing) generated increased sequential sales volume, the global capacity overhang facing the steel industry proved difficult to navigate.
As global steel production outpaced demand, Schnitzer was subject to declining scrap prices and export volumes. In total, 73% of ferrous sales volume was accounted for by export customers, with China, Turkey, and Malaysia serving as the leading end-market destinations.
Management, however, expressed optimism about the prospects of its auto parts business, as Schnitzer opened 11 new auto parts stores. Notably, eight of these stores are close to Schnitzer metal recycling plants, thereby allowing for material synergies as unused metal from vehicles in the company’s “Pick-N-Pull” stores can be quickly processed into ferrous and nonferrous scrap metal. Continued growth in the auto-parts segment would bode well for earnings potential, as the segment is characterized by high returns and low capital intensiveness.
Additionally, the countercyclicality of the auto-parts business protects Schnitzer from severe slumps in financial performance, as more consumers tend to fix their own vehicles rather than replace them during economic downturns. Continued diversification would likely prove advantageous for Schnitzer and additional investment in the auto-parts and steel manufacturing business units would capitalize on the company’s vertically integrated business model.
Suggested Reading: Best Business Movies