Selling scrap metal to China, a huge steel producer, sounds as foolish as carrying coals to Newcastle. But that, oddly enough, is one of the major attractions of Schnitzer Steel. The 100-year-old Oregon company is the largest U.S. exporter of scrap and is a "misunderstood China play" that, for the most part, is ignored by Wall Street, says Morgan Stanley analyst Wayne Atwell.
Morgan Stanley’s initiation came at virtually the same time that Goldman Sachs upgraded the stock to outperform. The Goldman move helped boost the shares 8% on Tuesday, to about $38. The stock (symbol SCHN) trades at ten times the average analyst earnings estimate of $3.82 per share for the fiscal year ending next August and nine times the $4.22 per share estimate for the August 2007 year. Stocks of most other U.S. mini-mill stocks, such as Nucor and Steel Dynamics, trade at double-digit price-earnings ratios.
Schnitzer is actually three businesses: steel recycling (its largest segment), mini-mill steel production and used auto-parts retailing, its smallest operation. The parts business looks like the odd duck, but it is profitable and steady, a counter to the cyclical steel business.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But it is, in fact, Schnitzer’s steel segments that make the stock interesting. The thinking is that over the next decade, the price of scrap, which is recycled into steel in mini-mills, will rise in lockstep with the key ingredients, such as coal and iron ore, used in traditional integrated steelmaking. As long as the global economy hums, Schnitzer’s profitability should improve. Morgan Stanley predicts that per-ton profit margins on scrap could expand by three to four times from the average margins of the past decade.
Not counting Tuesday’s upgrade-inspired jump, Schnitzer stock hasn’t done much in a while. But that’s part of the appeal. When Schnitzer moves, it really moves -- the shares rose more than 500% in 2003, for example. It sure can’t hurt to have analysts from big securities firms suddenly sound the charge for an obscure company with a stock that’s worth barely more than $1 billion.
One caution: Schnitzer still needs to wrap up the settlement of an SEC investigation over questionable past payment practices in Asia. The company says this is old news, but it still has to refer to this matter in earnings statements and other disclosures.
--Jeffrey R. Kosnett
-
Americans, Even With Higher Incomes, Are Feeling the SqueezeA 50-year mortgage probably isn’t the answer, but there are other ways to alleviate the continuing sting of high prices
-
Hiding the Truth From Your Financial Adviser Can Cost YouHiding assets or debt from a financial adviser damages the relationship as well as your finances. If you're not being fully transparent, it's time to ask why.
-
How to Manage a Disagreement With Your Financial AdviserKnowing how to deal with a disagreement can improve both your finances and your relationship with your planner.
-
If You'd Put $1,000 Into Caterpillar Stock 20 Years Ago, Here's What You'd Have TodayCaterpillar stock has been a remarkably resilient market beater for a very long time.
-
I'm a 55-Year-Old Dad. Here’s How My 28-Year-Old Daughter Showed Me That AXP Is Still a Solid InvestmentAmerican Express stock is still a solid investment because management understands the value of its brand and is building a wide moat around it.
-
If You'd Put $1,000 Into AMD Stock 20 Years Ago, Here's What You'd Have TodayAdvanced Micro Devices stock is soaring thanks to AI, but as a buy-and-hold bet, it's been a market laggard.
-
If You'd Put $1,000 Into UPS Stock 20 Years Ago, Here's What You'd Have TodayUnited Parcel Service stock has been a massive long-term laggard.
-
How the Stock Market Performed in the First Year of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Lowe's Stock 20 Years Ago, Here's What You'd Have TodayLowe's stock has delivered disappointing returns recently, but it's been a great holding for truly patient investors.
-
If You'd Put $1,000 Into 3M Stock 20 Years Ago, Here's What You'd Have TodayMMM stock has been a pit of despair for truly long-term shareholders.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
