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         There is a lot of potential in the Iron & Steel industry. Steel prices have been gradually rising and industry financials have reflected this move. While large capitalization companies Nucor and United States Steel Corporation may seem to grab most of the sales, smaller companies are doing as good�if not better�than their industry rivals. One company, Steel Dynamics (STLD), is an example of a corporation benefiting from external pressures and its internal structure to provide shareholders with great financial statements.

         Before examining the financial statements, it is important to understand what Steel Dynamics does. According to Reuters, Steel Dynamics "is a steel producer in the United States, with an annual steelmaking capability of 5.2 million tons." The company operates in three different segments: steel, fabrication, and scrap. Steel operations (89% of sales) deal with turning steel scrap into sellable pieces of steel. These steel pieces are then sold particularly to the construction, transportation, and railroad industries. The steel operations are also divided into a flat roll division. Here, products including low-alloy and medium carbon steel are used for many vehicles. Steel sheets are also created for the use of garage door panels, furniture, and lighting equipment. The next segment of the business model, fabrication (8% of sales), "produces steel building components, including steel joists, girders, and trusses." These items are usually sold to non-residential steel fabricators. The last business segment, scrap, yields raw materials for the company's internal use.

         While the business model looks solid, it is important to see how it will perform in the future. Fortunately, there is a lot of potential for growth. According to MEPS Steel Product Price Levels, steel prices have grown 11% in 2007 for hot rolled steel coil and 10% for medium steel sections�both respectable gains. And given the current market, when interest rates are falling and currency prices are depreciating, this is a very favorable time for commodities. More money in the economy will mean more consumers are purchasing goods�including steel. More demand equals a higher price and larger sales for companies like Steel Dynamics. However, this is not to say that Steel Dynamics had not performed well historically. One piece of evidence for Steel Dynamics to grow further is its past performance. Since 2002, only once in 2005 has Steel Dynamics had a negative calendar year. In fact, in 2006 the share price of Steel Dynamic grew over 90%. And in 2007, the share price is 44% higher than the premium set in December of last year. Growth in this industry is phenomenal and will continue with the incredible amount of liquidity injected into the economy.

         While the above reasoning may be convincing, investors can argue that all companies in this industry should benefit from these favorable external pressures. However, this is not the case. Last year Steel Dynamics earned sales of $3.23 billion. This number is comparable to its market-cap competitors: AK Steel, Gerdau, and Carpenter Technology. What differentiates Steel Dynamic is its internal efficiency. Sales have grown 38.08% over the past year. This number is far greater than the industry average of 20.04% and also quite higher than Steel Dynamic's market-cap competitors. Gerdau only saw 16.09% growth, Carpenter found 24.01% appreciation, and AK Steel grew 17.91%. Moreover, Steel Dynamic's growth extends to the bottom line. For the past fiscal year, Steel Dynamics earnings increased 47.58%. Again, this number was greater than the industry average of 32.99% and also much higher than industry rivals Carpenter (6.35%) and Gerdau (21.62%) during the same time.

         In addition to growth, Steel Dynamics has a great common-sized margin production. Gross margins over the past fiscal year for this company stood at 25.70%. Not only is this number than the corporation's five year average at 24.22%, but this number is again better than the industry's average of 20.52%. These margins are also higher than each of the three aforementioned market capitalization rivals. Higher margins mean better cost control and higher profit. Operating margins 20.20% is also higher than the company's five year average (19.41%), industry average (14.31%), and three respective rival averages. More importantly, the net profit margin of 11.90% that Steel Dynamics has is not only above most other companies in this industry, but illustrates that Steel Dynamics can produce nearly 12 cents of profit for every dollar of revenue. Operations that will continue to yield such a large percentage will only allow Steel Dynamic's share price to rise further.

         After examining the growth qualities of Steel Dynamics, some investors may fear that this company is too expensive. However, this observation is far from the truth. The current P/E ratio of the steel industry is at 14.22%. The current price to sales ratio is at 1.22. According to Reuters, analysts expect the 2007 forward earnings multiple at 11.22 and the forward price to sales ratio at 1.21 for Steel Dynamics. Both numbers are below the industry. In addition, only Gerdau has a lower valuation relative to market-cap competitors. Carpenter's earnings multiple of 13.44 and AK Steel's multiple of 13.09 indicate expensive stocks. With respect to Gerdau, while the multiple may be lower than Steel Dynamic's, Steel Dynamics has a much better growth potential, given historical performance, and should continue to keep its valuation low if earnings keep positively surprising.

         To further entice investors about the benefits of owning Steel Dynamics, dividends can be used. This corporation provides a dividend yield of 0.85%, which is above the industry average. Steel Dynamics also has a current ratio of 2.11�illustrating the company's solvency, and the company's debt is fairly low with 0.65 debt to equity ratio. However, despite a large equity base, ROE remains incredibly high for Steel Dynamics. Over the past fiscal year, ROE increased from its five year average of 28.38% to 34.86%. Its current ROE is higher than the industry's average of 32.54% and also higher than Carpenter's and Gerdau's respective net profit to shareholder equity ratio. Moreover, the company is efficient. The receivable turnover of 8.86 is solid and the inventory turnover of 4.18 also indicates good management control. Steel Dynamics also has a solid cash basis. Its price to free cash flow of 7.87 is far below the industry's average of 10.36. And the company uses some of this cash for capital expenditures that it currently has a 7.23% average on. Steel Dynamics is also 82.26% owned by institutional investors. This statistic indicates that the smartest investors see great potential with this company, and through their research decide to spend millions of dollars on shares.

         Therefore, through the provided business model and financial analysis, there is lots of great information about Steel Dynamics. The share price just recently moved ahead of its 50 day EMA and SMA, and should continue its momentum, especially given the recent economic news. Therefore, there are plenty of reasons investors can use to add shares of Steel Dynamics to portfolios.

-Dennis Biray
September 28th, 2007