Author Topic: STLC CN - Stelco  (Read 1020 times)

petec

  • Hero Member
  • *****
  • Posts: 1703
STLC CN - Stelco
« on: November 23, 2018, 01:41:11 AM »
Stelco was the Canadian part of US Steel. It came to my attention after Fairfax bought a stake. I thought it was interesting enough to have its own thread.

It's not in an attractive industry - commoditised and low ROIC. But as a stock, at a superficial level, it has attractions:
- Newest a lowest cost plants in North America (they claim)
- Recently out of bankruptcy with no debt and low, fixed payments for legacy employee liabilities - a practically unique balance sheet within the industry
- A management team who claim to have created great shareholder value before, with a vision to grow Stelco by buying distressed assets when no-one else has money
- Cash on the balance sheet and a stated aversion to structural debt (i.e. they'd lever to acquire, but then pay down)
- 2x run rate ebitda plus a plan to develop and divest noncore assets (land)

The epic caveat is that steel prices are high and falling. Part of the reason they rose is because China has been shuttering old, inefficient, polluting capacity and I expect this to be permanent. Also, Stelco started this year with prices well below market and has been playing catch-up. Nonetheless, one can't assume that run rate ebitda is sustainable.

Other than that I don't yet know a lot about the stock, management's history, or the industry. If anyone can educate me I'd appreciate it.


BeachHouse

  • Newbie
  • *
  • Posts: 1
Re: STLC CN - Stelco
« Reply #1 on: December 26, 2018, 07:12:37 AM »
I've been reading up on this one as well. The problems in my view are that:

- it's a hyper cyclical and terrible industry that is unlikely to attract many long-term investors to the stock. Seriously high fixed cost, over-capacity, levered peers, and exposed to very cyclical end markets -- very poor returns. 

- While China appears to be focused on reducing pollution and may create a more rational global steel market in the process, it's very hard to make this bet, and if I'm wrong in making this bet, the industry will have years of weak prices and the stocks will do nothing; I feel least comfortable about the fundamentals of the China aspect of the idea.

- the steel stocks basically move in-line with steel prices, and steel prices are near all-time peaks, but have been extraordinarily volatile over the last few decades, suggesting that there are very few cases where steel prices held at this level and didn't crash -- which means that the stock is more likely to underperform.

- it's hard to tell what the "true" free cash flow of the business will be relative to the "true" enterprise value of the business, or how long we can trust that free cash flow given #1. the company could do a better job focusing investors on its true FCF, which is where the valuation discrepancy is the widest with its peers.

- given the low liquidity in the stock it seems to me that a significant buyback is unlikely, which means that there is a significant risk that they will be taking capital and putting it into (definitionally given the low valuation on the parent company) lower returning businesses. 

The positives are that:

+ It appears that the US and Canada are serious about revitalizing their steel industry, and we should have at least 2 more years of these tariffs and inflated steel prices. 

+ Stelco appears to have a competitive advantage in North America on its cost structure due to removing legacy liabilities and balance sheet issues. this is probably the best aspect of the entire idea.   

+ Stelco generates a large amount of FCF relative to its market cap and EV, and with the right bets, could turn that FCF into an even larger and more profitable business. this is the reason to hold the stock for 5 years.

+ It's certainly the cheapest steel company in the world on EV/FCF.

I'm pretty torn! Does anyone know the management team well, or what Fairfax was thinking?

 

wondering

  • Jr. Member
  • **
  • Posts: 94
Re: STLC CN - Stelco
« Reply #2 on: February 20, 2019, 07:41:28 AM »
https://www.stelco.com/sites/default/files/2019-02/Q4%202018%20-%20Investor%20Call%20Deck%20%20FINAL2.pdf

"HAMILTON Stelco Holdings Inc. says it saw a significant earnings boost in the fourth quarter as both shipments and steel prices rose while it reduced tariff costs. 

The company says it had a net income of $110 million, or $1.23 per share for the quarter ending Dec. 31, up from $15 million or 21 cents per share for the same quarter a year earlier.

Adjusted net income came in at $100 million or $1.13 per share, which was up from $52 million a year earlier but below analyst expectations of $142 million or $1.36 according to Thomson Reuters Eikon.

The company says it has been using a flexible model that allowed it to reduce costs from the U.S. metal tariffs by 41 per cent from the third quarter to $23 million.

Stelco says it continues with efforts to reduce tariff exposure into 2019, and supports the Canadian government's efforts to eliminate the tariffs as well as measures to safeguard increases of foreign imports into the Canadian market.

It says it has issued a special dividend of $100 million or $1.13 on top of its regular quarterly dividend on the strength of its results."