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Zack’s Bear of the Day Schnitzer Steel


Schnitzer Steel (NASDAQ:SCHN) has seen its estimates fall due to several factors; declining steel prices, declining ferrous scrap metal prices, and persistently low oil prices, all of which have created a massive headwind for the company.

This Zacks Rank #5 (Strong Sell) company manufactures and exports recycled ferrous metal products worldwide.  The company operates in three segments:  Metals Recycling Business (MRB), Auto Parts Business (APB), and Steel Manufacturing Business (SMB).  The company was founded in 1906, and is headquartered in Portland, Oregon.

The average spot trading for HRC (Hot Rolled Coil Steel) has dropped to a five year low last seen in December of 2009 (at or near the $500/ton level).  According to the World Steel Association, February was the fifth consecutive month without growth. The weakness in the industry has been attributed to import competition, declining oil prices, high inventories, and raw material cost deflation.  Further, the ferrous scrap price index has seen prices plunge down $80-$100 per ton, depending on the region, in February.  Both of these factors are significant negatives for the company.

The table below shows the Price and Consensus estimates for Schnitzer.  As you can see, expectations have declined, and are not expected to see any signs of a rebound in the near term.

Declining Estimates

Over the past 30 days, earnings estimates for Schnitzer have dropped significantly for Q2 15, and FY 15; Q2 15 dropped from $0.15 to -$0.03, and FY 15 fell from $0.59 to $0.34.  Estimates have also decreased for Q3 15, and FY 16 as well, showing that long term expectations are negatively impacted by the decline in oil and steel prices.

Bottom Line

Several factors including HRC and ferrous scrap prices hitting multi-year lows and stubbornly low oil prices have created a very difficult environment for Schnitzer Steel.  Further, there is no real indicator that shows this negative trend is going to reverse itself in the near term.  Therefore, Schnitzer Steel is our Zacks Bear of the day.

If you are inclined to invest in the Steel Producers segment, you should look at Thyssen AG (TYEKF), currently holding a Zacks Rank #1 (Strong Buy), or Kobe Steel-ADR (KBSTY), currently holding a Zacks Rank #2 (Buy).

 

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