Schnitzer Steel Industries, Inc. (NYSE: NASDAQ: FAST) is an American steel manufacturer based in Portland, Oregon. Though the company has grown into a multi-billion dollar manufacturing giant, it started from humble beginnings. In 1906, Russian immigrant Sam Schnitzer started the company as a one-person scrap recycling business. Since then, the company has grown massively thanks to a series of acquisitions. In 2003, the company acquired Pick-N-Pull. In 2005, GreenLeaf Auto-Recyclers was acquired along with Regional Recycling. Schnitzer Steel Industries then sold GreenLeaf Auto-Recycler in 2009. In 2006, the company acquired Advanced Recycling. While the company has performed well from a growth perspective, it hasn’t performed without controversy. In 2007, the SEC indicted then-CEO Robert Phillip for violating the Foreign Corrupt Practices Act. The charges came after evidence of illegal dealings with Chinese steel mills was uncovered.
In this article, I will show that despite the current consumer preference for imported steel, the domestic steel market is poised for a significant upswing. That makes Schnitzer Steel Industries a smart investment. As the conflict in Ukraine sends oil prices skyrocketing, the transit costs of imported steel will rise, forcing companies to charge higher prices. As price is the main issue discouraging consumers from shopping domestically, this will level the scales. Additionally, with the passage of the $1 trillion infrastructure bill, the need for steel for construction projects will increase. All of these factors favor the growth of companies like Schnitzer Steel Industries. For these reasons, investors looking to expand their portfolio to take advantage of industrial growth should consider Schnitzer Steel Industries.
Overview of the iron and steel market
Price increases are a major reason why the domestic market does not grow with demand. In 2021, domestic steel prices from US companies reached a record high. This is due in large part to the costs associated with manufacturing. Since the processes are cheaper in other countries, many consumers choose to buy or order imported steel from other countries. This creates a kind of “Catch 22” in the industry. Price discourages consumers from creating demand, and the lack of demand combined with the cost of production keeps the price high.
There is a silver lining, however, and that comes in the form of the Russian invasion of Ukraine. While the war is in no way shaping, shaping, or shaping anything good, the iron and steel industry is benefiting from the rising cost of fuel. This is because shipping becomes more expensive for imports. This will level the cost compared to domestic steel and could result in revenue growth for America-based companies. Combined with the fact that North America has increased its steel production rates and American steel mills know they need to incentivize their customers to win them back, I see a positive uptick for companies like Schnitzer Steel Industries in the near term.
One of the biggest opportunities for Schnitzer Steel Industries is in the political arena. The passage of the Biden administration’s $1 trillion infrastructure bill bodes well for the construction, steel and iron industries in general. Much of this money is earmarked for repairing roads and bridges, which require a lot of steel. With the increased shipping costs associated with the war in Ukraine, the timing provides a prime opportunity for US steel companies to step up.
The global steel market is expected to see some growth in the coming years as well, adding to the optimism in the industry. Over the next decade, the market is expected to grow at a slow and steady CAGR of 3.9%. While this is not a significant growth rate, one of the key drivers in the steel market is infrastructure, meaning US steel markets are likely to exceed this global CAGR forecast due to the Biden administration’s bill. In a market normally lacking in growth and optimism, there could be an insidious short-term win for domestic steelmakers in the near future.
Schnitzer Steel Industries’ sales have been relatively stable over the past four years. As of 2018, the company had sales of $2.3 billion. In 2019, that number declined slightly to $2.1 billion. The 2020 Covid-19 pandemic wreaked havoc on most U.S. markets, and Schnitzer Steel Industries was no exception as revenue fell to a four-year low of $1.7 billion. However, 2021 was a year of redemption as the company reported record sales totaling $2.75 billion for the fiscal year ended Aug. 31.
A downside to this trend is the ever-increasing cost of sales, causing profit margins to lag behind revenue. In 2018, the company had cost of sales of $2 billion, which reduced profits to just $354 million. 2019 was another disappointing performance with a COR of $1.8 billion, dropping earnings to $274 million. 2020 was a total flop with a $1.5 billion COR and a low $208 million in earnings overall. 2021 was a little cheaper with a COR of $2.3 billion and earnings of over $450 million. While earnings numbers aren’t as healthy as earnings suggest, the fact that the company has been consistently profitable is a positive.
The company has steadily increased its cash and cash equivalents over the past four years. While this is a positive trend, the totals are not high enough to have a significant impact. In 2018, the company had $4.7 million in cash. In 2019, that number rose to just over $12 million. Despite the pandemic in 2020, the company’s cash position grew again to $17.8 million. Finally, in 2021, the company ended the fiscal year ended August 31 with $27.8 million. While the numbers aren’t significant just yet, if the company is able to keep growing its cash totals, it will bring them plenty of stability going forward.
Schnitzer Steel Industries has also done an excellent job of paying off its long-term debt. In 2018, the company held $106 million in long-term debt. By 2019, the company had already worked to settle that sum, bringing the figure to $103 million. A pandemic hit the company in 2020, but it still managed to pay off a small portion of its debt, bringing the total to $102 million. In 2021, the company made its best debt-repayment effort, reducing its long-term debt by just $75 million.
One thing that has benefitted the company in today’s market was its aggressive streak of acquisitions in the early 2000s. Because of this, today the company owns a significant amount of assets that allow it to expand its operations and gain additional market stability. This has helped them withstand the lack of consumers and price hike that has led to the demise of many domestic competitors. In 2018, the company had total assets of $1.1 billion. In 2021, that number rose to just under $1.5 billion, which is a very positive indicator for the company.
Schnitzer Steel Industries, Inc. is one of those rare companies in a tough market that is worth investing in. As it stands now, the company just hit record highs in terms of sales and earnings. It has gone to considerable lengths to repay its debts, has an impressive total net worth, and is amassing a significant amount of cash. This gives the company a degree of stability and flexibility that is rare in their market. There is also an insidious dose of optimism for the future. The Biden administration’s infrastructure bill offers opportunities, and soaring fuel costs, attributed to the Russian invasion of Ukraine, have pushed up the cost of imported steel. This shifted the needle of cheapness back towards the domestic market. If Schnitzer Steel Industries is able to capitalize on this and keep their customers coming back, I think there will be a short term return on investment. For these reasons, I believe Schnitzer Steel is a bullish future buy.