Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Stocks for Using A Benjamin Graham Value Investing Strategy – FebruaryÂ 2017.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Steel Dynamics Inc (STLD)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Steel Dynamics, Inc. is a steel producing and a metal recycling company. The Company is engaged in manufacturing and selling of steel products, processing and selling of recycled ferrous and non-ferrous metals, and fabricating and selling of steel joist and deck products. Its segments include steel operations, which include the Company’s Butler Flat Roll Division, Columbus Flat Roll Division, The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia and Iron Dynamics (IDI); metals recycling operations, which include both ferrous and nonferrous scrap metal processing, transportation, marketing, brokerage and consulting services; steel fabrication operations, which include over eight New Millennium Building Systems joist and deck plants located throughout the United States and Northern Mexico, and other operations, which consist of its Minnesota ironmaking operations, and several smaller joint ventures.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of STLD – February 2017
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$8,694,484,748||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||4.11||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||4.03%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||31.06||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.99||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||4.11||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||1.06||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||6.54%|
|MG Value based on 3% Growth||$16.62|
|MG Value based on 0% Growth||$9.74|
|Market Implied Growth Rate||11.28%|
|% of Intrinsic Value||143.89%|
Steel Dynamics, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of earnings stability over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.8 in 2013 to an estimated $1.15 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 11.28% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Steel Dynamics, Inc. revealed the company was trading above its Graham Number of $23.7. The company pays a dividend of $0.56 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 31.06, which was below the industry average of 35.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.31.
Steel Dynamics, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$2.31|
|Number of Consecutive Years of Dividend Growth||3|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2016|
|Total Current Assets||$2,929,675,000|
|Total Current Liabilities||$712,815,000|
|Shares Outstanding (Diluted Average)||245,511,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.08|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.15|
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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