SCHN is -24% below its 52-week high. Is it also a good bargain?

One of the unavoidable side effects of a global pandemic is the impact it has on businesses. For companies in service-focused industries, some of that impact was confined mostly to shifting their workforce to remote work models that enabled them to keep going. For production-oriented businesses, the challenge has been very different. Complying with distancing and enhanced safety requirements to keep production facilities running required costly capital investments in infrastructure and modifications of production lines. When you add to the mix infection and hospitalization rates that have continued to limit labor capacity even as production capacity began to recover, you have a mix that has had a ripple effect throughout the supply chain in just about every corner of the economy.

An example of an industry where remote work and business isn’t possible in the same way as other businesses is the Steel industry. This is a segment of the economy that is highly cyclical and sensitive to the ebb and flow of economic activity. The COVID-mandated shutdowns of early 2020 brought these kinds of industries to a practical standstill, and the truth is that there are still a lot of residual effects that continue to hang over companies and challenge their ability to be profitable.

Schnitzer Steel Industries (SCHN) is a long-established company in the Steel industry that specializes in recycling ferrous and non-ferrous scrap metal of all kinds such as end-of-life vehicles. They also repurpose scrap metal into finished steel products and have operations on both the East and West coasts of the U.S. They fit into a small-cap market description, but were founded in 1906 and have paid a consistent dividend since their initial public offering in 1993. They have also kept their dividend payout consistent since 2012 – which also means that while a lot of companies in this and other economically sensitive industry where reducing or eliminating their dividends in 2020 to preserve cash, SCHN stood above the rest in one of the most challenging economic periods in about 90 years.

SCHN’s stock price fell to historical lows at the early stage of the pandemic, finding bottom at around $11 in March of 2020, but surged in a big way as economic activity and production started to resume and pick up last year. The stock more than quintupled in price by June of last year, peaking at around $59.50. The stock has been mostly range-bound since then, and more recently has been picking up bearish momentum to start 2021, falling almost -24% from that high point to its current level. That could be an interesting turn of events for a contrarian-minded, value-focused investor, but do the company’s fundamentals also line up with its value proposition to create an opportunity that is worth considering? Let’s dive in and try to find out.

Fundamental and Value Profile

Schnitzer Steel Industries, Inc. is a recycler of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. The Company acquire, process and recycle auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through its recycling facilities. The Company sells ferrous and nonferrous recycled scrap metal in both foreign and domestic markets for metal producers, processors and brokers. It also sells a range of finished steel long products produced at its steel mini mill. Its steel mini mill produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using ferrous recycled scrap metal. It also includes deep water port facilities on both the East and West Coasts of the United States in in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and Portland, Oregon. SCHN’s current market cap is $1.3 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased more than 177% (not a typo) while revenues rose almost a little over 62%. In the last quarter, earnings declined -12.7% while revenues were about -5.6% lower. SCHN’s margin profile is generally narrow, but is showing some weakness; as a percentage of Revenues it declined from 6.44% over the last twelve months to 5.79% in the last quarter.

Free Cash Flow: SCHN’s free cash flow is modest, at $37 million over the last year. That does mark an increase over the last year from $7.21 million, but also declined from about $72 million in in the last quarter. The current number translates to a modest Free Cash Flow Yield of 2.96%.

Debt to Equity: SCHN has a debt/equity ratio of .29, which by itself is very conservative, but also increased from .08 in the quarter prior. Their balance sheet shows a little over $19 million in cash and liquid assets (down from $27.82 million in the quarter prior) against about $256 million in long-term debt. The company’s operating profile suggests that margins are sufficient to service the debt they have, but liquidity is a concern that bears watching.

Dividend: SCHN pays an annual dividend of $.75 per share, and which translates to a yield of about 1.65% at the stock’s current price. That isn’t very impressive by itself; but the fact the company has maintained their dividend since 2012 can be taken as a signal of strength.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $30 per share. That means that even with the stock’s decline, SCHN is significantly overvalued right now, by about -33%, with a practical discount price at around $24 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from February to June 2021, and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. From that peak, the stock found a new bottom at around $40 per share, and then rallied again to test levels close to its yearly high in October and November. Starting this month, the stock has picked up bearish momentum, falling from a pivot high at around $54 to its current price at around $45. The stock does appear to be finding current support right now at around $45, with immediate resistance sitting at around $47, inline with the 38.2% retracement line. A push above $47 should have upside to about $52 before finding next resistance, while a drop below $45 should find next support between $43.50 and $42.50 per share.

Near-term Keys: Unfortunately, neither the stock’s valuations levels, nor the fundamentals for SCHN justify any kind of a useful, long-term, value-based opportunity. That means that the best probabilities lie in short-term trading strategies. A break above $47 could offer an interesting buying opportunity, either with the stock or with call options, with an eye on $52 as a target price, while a drop below $45 could offer an opportunity to short the stock or buy put options with an eye on $43.50 to $42.50 per share as a bearish profit target.