Olympic Steel Inc. (NASDAQ: ZEUS) is actively expanding its business by acquiring companies closely related to its business segments. Its revenue has increased over the past year due to the commodity supercycle, but Olympic Steel recently ran into problems due to falling metal prices, which caused its inventory to depreciate. The stock’s price outpaced the S&P 500 and Dow Jones Industrial Metals & Mining index (DJUSIM) by well over 30%. The stock’s price outpaced the S&P 500 and Dow Jones Industrial Metals & Mining index (DJUSIM) by well over 30%. Цена акций превысила индекс S&P 500 и Dow Jones Industrial Metals & Mining (DJUSIM) более чем на 30%. The stock price outperformed the S&P 500 and the Dow Jones Industrial Metals & Mining (DJUSIM) by more than 30%. Акции торгуются более чем на 30% выше индекса S&P 500 и промышленного индекса Dow Jones Industrial Metals & Mining (DJUSIM). The stock trades more than 30% above the S&P 500 and the Dow Jones Industrial Metals & Mining (DJUSIM).
While Olympic Steel has shown a strong positive correlation with the metal price index during the steel boom that began during the COVID-19 pandemic, the question now is whether the company can sustain growth and let its sails dictate the direction, not the wind. ?
While the company is a good buy under normal circumstances, I am neutral about the current recession until commodity prices return to normal levels, at least by the end of the year.
Olympic Steel, Inc., a small public company with a market capitalization of US$293.77 million, is a metal services center that processes and sells metals in the United States. The company operates three separate business units;
Specialty Metal Flats and Carbon Flats: These two divisions are often combined due to the similar nature of the resources used by the two divisions, resulting in cost sharing. According to the company’s annual report, the products of both divisions are stored in common facilities, and in some places are processed on shared equipment. The carbon flat product and specialty metal segments generated the majority of the revenue for Olympic Steel, accounting for 55% & 29% of the revenue in the MRQ. The carbon flat product and specialty metal segments generated the majority of the revenue for Olympic Steel, accounting for 55% & 29% of the revenue in the MRQ. The Carbon Flat and Specialty Metals segments generated the majority of Olympic Steel’s revenue, accounting for 55% and 29% of MRQ’s revenue. The carbon flats and specialty metals segments account for the majority of Olympic Steel’s revenue, accounting for 55% and 29% of MRQ’s revenue, respectively.
The Carbon & Specialty Sheets segment includes 33 strategic refining and marketing facilities in the US and one in Monterrey, Mexico.
The company’s third segment, Tubular Products, includes eight properties and accounts for 16% of MRQ’s revenue. The company is gradually shifting its focus to the specialty metals segment, and it is clear from the annual revenue that the revenue from flat products has increased. On the contrary, the production of pipes and pipe products decreased.
Corporate services are mainly provided by industrial machinery and equipment manufacturers, automobile manufacturers, electrical equipment manufacturers and agricultural machinery manufacturers.
The company’s most important customers are manufacturers of industrial machinery and equipment, which account for more than 27.4% of MRQ’s net sales. Other relevant figures are also shown in the table below.
In September 2021, Olympic Steel sold its Detroit business unit to Venture Steel Inc. for $58.4 million plus a working capital adjustment of approximately $13.5 million to close in early 2022. This shows an improvement in cash flow from investing activities in its financial statements, which declined by more than 50% from $28.1 million in 2020 to a total loss of $13.5 million at the end of 2021.
“We remain focused on our long-term strategy to further diversify our business, deliver continued profitability and increase shareholder value. The proceeds from the sale of the Detroit business will be used to reduce debt, resulting in greater flexibility for organic incremental acquisitions and investments in plans for growth and automation.
Over the past few years, Olympic Steel has shifted its focus from carbon flat products to specialty metal sheets. It seeks to integrate metal-intensive manufacturers into its business model by acquiring companies in the same industry.
Operations in Detroit are focused on distributing carbon flats to domestic automakers and their suppliers, primarily in the carbon flats segment. Olympic Steel reports that less than 3% of their sales come from automakers or auto parts manufacturers.
Right after Detroit’s carbon-centric operations sale, Olympic Steel used some of the sale proceeds to acquire another stainless steel and aluminum distribution business, Shaw Stainless Steel & Alloy, Inc., for $12.1 Million. Right after Detroit’s carbon-centric operations sale, Olympic Steel used some of the sale proceeds to acquire another stainless steel and aluminum distribution business, Shaw Stainless Steel & Alloy, Inc., for $12.1 Million. Сразу после продажи Детройта, ориентированного на выбросы углерода, Olympic Steel использовала часть выручки от продажи для приобретения другого предприятия по продаже нержавеющей стали и алюминия, Shaw Stainless Steel & Alloy, Inc., за 12,1 миллиона долларов. Immediately after the sale of carbon-driven Detroit, Olympic Steel used a portion of the proceeds from the sale to acquire another stainless steel and aluminum merchant, Shaw Stainless Steel & Alloy, Inc., for $12.1 million.在底特律以碳为中心的业务出售后，Olympic Steel 使用部分出售收益以1210 万美元收购了另一家不锈钢和铝分销企业Shaw Stainless Steel & Alloy, Inc.。在 底 特律 以 碳 为 的 业务 出售 后 ， olympic steel 使用 出售 收益 以 1210 万 美元 了 另 一 不锈 钢 铝 分销 企业 企业 Shaw Stainess Steel & Alloy, Inc .。 После продажи своего углеродоориентированного бизнеса в Детройте Olympic Steel использовала часть выручки от продажи для приобретения Shaw Stainless Steel & Alloy, Inc., другого дистрибьютора нержавеющей стали и алюминия, за 12,1 миллиона долларов. Following the sale of its Detroit carbon business, Olympic Steel used a portion of the sale proceeds to acquire Shaw Stainless Steel & Alloy, Inc., another stainless steel and aluminum distributor, for $12.1 million. In 2019, Olympic Steel also acquired Action Stainless & Alloys for $19.5 Million. In 2019, Olympic Steel also acquired Action Stainless & Alloys for $19.5 Million. В 2019 году Olympic Steel также приобрела Action Stainless & Alloys за 19,5 миллионов долларов. In 2019, Olympic Steel also acquired Action Stainless & Alloys for $19.5 million. 2019 年，Olympic Steel 还以1950 万美元收购了Action Stainless & Alloys。 2019 年，Olympic Steel 还以1950 万美元收购了Action Stainless & Alloys。 В 2019 году Olympic Steel также приобрела Action Stainless & Alloys за 19,5 млн долларов. In 2019, Olympic Steel also acquired Action Stainless & Alloys for $19.5 million. Similarly, at the beginning of 2018, Olympic Steel acquired Berlin Metal, one of the largest service centers in North America, which processes and sells premium tinplate and stainless steel strip in the form of slotted coils.
Achieving economies of scale and diversifying its portfolio through acquisitions has been a focus of Olympic Steel over the past five years and has acquired more than five companies, including four in the last five years. These side acquisitions clearly demonstrate that Olympic Steel intends to focus on expanding and diversifying its portfolio and reducing the cyclicality of existing businesses.
Chinese demand has already suffered this month and we may soon see a trickle down effect on US companies. Prices for steel and its main component iron ore fluctuated during the Shanghai lockdown, but showed a downward trend earlier this month, according to CNBC. Allied Market Research estimates that the specialty metals market will grow at a CAGR of 3.50% to reach $276 billion by 2031. This growth estimate seems conservative for a small cap company like Olympic Steel Inc.
Share prices in most metals, mining and commodities sectors have risen and are likely to continue to rise as long as higher-than-expected inflation figures are reported. As a result, the price of ZEUS has hovered around $27 over the past year, with a 52-week high just over $43.
Investors are now looking to invest in the sector’s strong stocks, which can weather more difficult times if they find themselves in a riskier environment. Strong fundamentals, healthier balance sheets and excess liquidity will be some of the key factors to keep an eye on in difficult market conditions as price momentum may not reflect a company’s true position.
The company reported an MRQ EPS of $3.10, outperforming estimates by $0.84, bringing a price-to-earnings ratio of 2.06 over the past 12 months. This price-to-earnings ratio is significantly better than competitors, averaging 11.76x. Likewise, all key metrics are significantly lower relative to their peers, with an average discount across all metrics of 70%, suggesting upside potential for Olympic Steel prices.
In addition, in May 2022, the Board of Directors approved the payment of a regular quarterly dividend of $0.09 per share to registered shareholders as of June 1, 2022, due on June 15, 2022.
Similarly, 35% ROE and 13% ROTA indicate better resource utilization than the industry, more than double the industry medians of 12.86% and 5.22%.
I expect inventory values ​​to decline in the third quarter of 2022 due to the recent sharp decline in metal prices. So far, price and fundamental momentum have been correlated. If fundamentals remain strong, it would be unbiased and logical to assume that small-cap stocks will deliver decent returns in the long run.
Of note is that Olympic Steel’s debt-to-equity ratio is quite high at 73.41%, with most of its debt classified as secured long-term debt, although it decreased by 5.83% year-on-year, from $360 million to $339. million is in the MRQ.
Olympic Steel signed a $455 million loan agreement with Bank of America (BAC) in 2017, which expires in December 2022. The revolving agreement extends the existing $475 million five-year revolving credit facility until June 2026, secured primarily by the company’s receivables, inventory, and property and equipment. The fund includes up to $200 million in growth options.
As a company in a cyclical industry, Olympic Steel faces a lot of systemic risk. This high leverage resulted in a higher beta for the company at 1.51, resulting in higher volatility.
The company’s capital structure should be balanced, ideally a company’s high debt should have a low cost of capital, benefiting from cycles by locking in lower interest rates ahead of a down cycle.
Fitch expects global steel prices to decline in 2022 once the recovery in global prices ends.
Outside of China, the US is lagging far behind its global competitors in restarting production capacity after Covid-19 disruptions and production cuts. Going forward, Fitch expects US supply to resume in the coming months and imports to improve, leading to a gradual stabilization of US steel prices in 2022.
Olympic Steel is hard at work expanding its business both at home and abroad, but if the company hopes to compete with the big players in the coming years, it needs to expand its business, which is projected to grow at a higher annual rate. rate than special metals, or 3.5%. Olympic Steel has high leverage risk in increasing shareholder value, which makes investing in the company a high risk and reward scenario due to its relatively small market capitalization.
Given the company’s history, it has taken bold steps to acquire and expand its business. But now is the time for Olympic Steel to reduce its debt and recapitalize it to an optimal level, where fluctuations in revenue and earnings should decrease over time to sustain organic growth.
Given the current market volatility and the cyclical nature of the industry in which Olympic Steel operates, we can see a rocky road ahead. Macro factors such as rising inflation rates, China’s COVID-related lockdown and recession pressures exacerbated market turmoil, prompting me to rate Olympic Steel as a “hold” until things calm down and there is some stabilization.
Disclosure: I/we do not have stock, options or similar derivatives positions in any of the companies mentioned and do not plan to take such positions within the next 72 hours. Business Relationship Disclosure: This article was written by Haider Arshad Research and reviewed and submitted by Mr. Walid Tariq.