Its shares falling by -3.66% today, Steel Dynamics seems to be confirming what most analysts are saying about the stock. Despite its average rating of hold, might the stock be attractive to long term value investors? Let's unpack some of the company's fundamentals to find out.
Over the last year, Steel Dynamics shares have moved 78.92% while trading between the prices of $61.93 and $136.45. This represents a 82.62% difference compared to the S&P 500, which moved -3.7% over the last 52 weeks.
At its current price of $131.08 per share, STLD has a trailing price to earnings (P/E) ratio of 5.95 based on its 12 month trailing earnings per share of $22.04. Considering its future earnings estimates of $8.01 per share, the stock's forward P/E ratio is 16.36. In comparison, the average P/E ratio of the Industrials sector is 20.49 and the average P/E ratio of the S&P 500 is 15.97.
Steel Dynamics's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. We can solve this problem by dividing the trailing P/E ratio by the company's five year earnings growth estimate, which in this case gives us a 10.91 Price to Earnings Growth (PEG) ratio.
A PEG ratio between 0 and 1 indicates a potentially undervalued stock. This metric is useful because some companies have a low P/E ratio for a reason: there is no earnings growth potential in the stock. Other companies may have high P/E ratios, but may still be undervalued if they have very high expected earnings growth rates. The main caveat with the PEG ratio is that it relies on the company's earnings growth estimates, which are potentially subject to manipulation.
We can also compare the ratio of Steel Dynamics's price to its book value. A company's book value refers to its present liquidation value: what would be left if the company sold off all its assets and paid off all of its debts today. STLD has a book value of 2.393, with anything close or below one indicating a potentially undervalued company.
The final element of our analysis will touch on Steel Dynamics's capacity to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Steel Dynamics has a free cash flow of $3,551,501,000.00, which it uses to pay its shareholders a 1.32% dividend.
By most metrics, Steel Dynamics is an undervalued stock. So why are analysts giving it a low rating? It probably has to do with their perception of its limited growth potential, as represented by its elevated PEG ratio. For growth-oriented investors, STLD is cheap for a reason. On the other hand, diehard value investors believe that if you wait long enough an undervalued stock will always reach a fair valuation. We will continue to monitor the stock to see which thesis prevails.