My latest column is up at RealMoney. It is a bullish piece about Reliance Steel (RS - Annual Report).

Prices for sheet metal work have been rising, and the durable goods orders show a rising trend.

Over the last 12 months, free cash flow (cash flow from operations less capital expenditures) has come in at $540 million, or 12.2% of Reliance’s current market capitalization. In 2007, it used $270 million to grow via acquisition and $82 million to repurchase shares. Even counting acquisitions as an alternative to capital expenditures, the free cash flow yield would be 6.1% — more than twice the current yield on five-year Treasuries. Modest growth from the acquisitions would allow for double-digit returns.

Reliance traded off somewhat when it reported earnings and guided to $1.50 to $1.60 per share in earnings for the June quarter. The consensus estimate prior to the report had been for $1.66, and it is currently $1.62. The guidance reflects uncertainty over demand and “flat to rising prices” and may thus prove conservative. Management was similarly uncertain when offering guidance for the recently reported quarter, and ended up beating estimates by 8 cents.

For the full year, earnings estimates continue to rise. Reliance is expected to earn $6.01 this year and $6.36 in 2009. Reliance’s nearest competitor, Worthington Industries (WOR) , is currently trading at 11.4 times forward earnings. At that multiple, Reliance shares could rise 20% to $72.50 over the next six to 18 months.

Disclosure: At time of publication, William Trent holds no financial position in the securities mentioned in this article.

My latest post is up at RealMoney.

In it, I extend yesterday’s observations about the hidden strength in durable goods orders to specific industries that might benefit. Among those industries were primary metals, computers and electronic products, and motor vehicles and parts.

These industries may prove to be a good starting point for further research.

Mid Cap Watch List (Track at Marketocracy) member Steel Dynamics, Inc. (STLD - Annual Report) announced second quarter earnings of $94 million, or $0.95 per diluted share, an increase of 7 percent when compared to $0.89 per diluted share in the second quarter of 2006 but below consensus estimates of $1.05. Diluted earnings per share decreased 6 percent from the first quarter of 2007, principally due to bond refinancing costs. Revenues increased to $911 million, 11 percent higher than the year-ago quarter and 5 percent higher than the first quarter of 2007, but below the consensus estimate of $948 million. Adjusting for the refinancing charge the earnings were $1.01, at the low end of the lowered guidance range the company provided in May. Guidance for the third quarter, however, was strong:

We expect market demand for flat-rolled steel to improve in the third quarter, following several months of inventory liquidation, which would provide the possibility of a higher third-quarter volume of shipments and
improved profit margins for sheet products. Combined with continued strong results for long products, we expect higher third-quarter earnings in the range of $1.10 to $1.15 per diluted share, subject to certain purchase accounting adjustments related to our acquisition of The Techs.

Consensus estimates for next quarter were $1.08, so the company now expects to make up for this quarter’s shortfall in the coming one. Given their forecasting success to date, we wouldn’t be surprised if investors say “show me the money.” Particularly since the company claims its customers have been liquidating inventory but the company itself has seen inventories balloon, which resulted in negative cash flow from operations for the quarter.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

Mid Cap Watch List (Track at Marketocracy) member Steel Dynamics, Inc. (STLD - Annual Report) announced that its Board of Directors approved an increase of 5 million shares to its existing share repurchase program.

During June, the company purchased the last of its previously authorized share repurchase program which was last increased in November 2006. Since September 2004, the Company has repurchased 30 million shares of its common stock.

I’m always skeptical of buyback announcements, given that so many companies just use them to soak up the shares they have given to managers as stock options. So I took a look at STLD’s 10K to make sure if there was really share reductions. In 2004 the company had 113 million shares at year-end, and they averaged 106 million in 2006. Adding the 5.6 million shares they have repurchased since, there has been a net reduction of 13 million shares.

Any reduction in share count helps, but there is still a significant difference between the 30 million shares they claim to have bought back and the 13 million actual net reduction in shares. Looking at the Statement of Shareholder Equity, it looks like much of the difference is due to convertible notes being converted into shares. Given that between acquisitions and growth opportunities revenues have increased 50% during the 2-year period, I’m willing to accept that.

I ended up doing a ratio analysis of Gerdau and Nucor for a book I am writing, and thought it was worth showing here.

This section presents ratio analysis of Brazilian steelmaker Gerdau SA (GGB) and U.S. steel producer Nucor (NUE). The reported numbers of these firms cannot be compared directly due to differences in size and currencies. Therefore, it is important to create ratios for each. Investors should also consider differences in accounting standards internationally when interpreting the ratios. Further, a time series analysis of each firm ratios calculated for three to five years in order to identify trends. Since many ratios require average balance sheet data, six years of data are required to compute five years of ratios. Since financial statements only contain data for two years of the balance sheet, it is necessary to either collect prior annual reports or use a data service such as Bloomberg, Baseline or Compustat. The tables below provide summary financial data from Zacks Research Wizard and the company financial statements for Gerdau and Nucor, respectively. Commercial databases almost always aggregate financial statement data into common categories. For example two or three income statement line items may be aggregated into one expense category. This can improve comparability between firms but can also result in a loss of information. The analyst must consider this when interpreting ratios. More »

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics, Inc. (STLD - Annual Report) reiterated its guidance for second quarter earnings in the range of $0.95 to $1.00 per diluted share.

“Shipping volume and pricing of flat-rolled steels thus far in the second quarter have been somewhat weaker than initially expected. Therefore, earnings could end up at the low end of the range due to continued softness in the flat-rolled steel marketplace,” said Keith Busse, Chairman and CEO of Steel Dynamics. “However, while weakness in the flat-rolled steel market has been prolonged due to a slower reduction in steel service center inventories than originally expected, we currently are seeing a slight strengthening and stabilization in pricing. We expect this pricing trend to continue and to improve into the third quarter.”

The earnings figure includes charges related to a debt restructuring, which will reduce EPS by $0.08.  Given the pricing power in overall steel products the issues around flat-rolled steel are disappointing. On the other hand, though, the support from the PPI statistics makes me much more willing to believe management’s third-quarter recovery forecast.

Producer prices rose 0.7 percent in April - Yahoo! News

Elevated energy costs pushed producer prices up a slightly more-than-expected 0.7 percent in April, but excluding volatile food and energy costs, prices paid at the factory gate were unchanged, a Labor Department report released on Friday showed.

As the headline (and core) numbers get widely reported, I like to dig a little deeper into the PPI report to find industries that appear to have more (or less) pricing power than normal. If the pricing power has not yet been recognized widely it can occasionally lead to some good stock picks. (All pricing power charts are from the Bureau of Labor Statistics.)
The pricing power in fruit and vegetable canning appears to be helping Del Monte gain some momentum.

Refinery margins hurt Large Cap Watch List (Track at Marketocracy) member Frontier’s (FTO) earnings. Is a turnaround in sight?

One place the pricing power theory definitely didn’t work is in industrial gas. The stocks never weakened, and now pricing power seems to be making a comeback.

Consolidation and pricing power? What’s not to like about Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics’ (STLD - Annual Report) prospects?

Pricing power for industrial valves helped me call the recent earnings pop for Curtiss Wright (CW - Annual Report).

Would you looky what’s happening to semiconductor pricing? Who would have expected that?

Well, that seems like enough for now. Back again next month.

Disclosure: William Trent has a long position in SMH.

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics (STLD - Annual Report) Reported Strong Sales and Earnings for First Quarter:

Steel Dynamics, Inc. today announced first quarter earnings of $102 million, or $1.01 per diluted share, an increase of 34 percent when compared to $76 million in the first quarter of 2006. Net income per share was relatively unchanged from the fourth quarter. Revenues increased 30 percent to $866 million from $666 million in the first quarter of 2006, largely due to the acquired Roanoke facilities not being included in first quarter 2006 results.

Those results handily beat the consensus estimate of $0.95, which in turn was at the low end of management’s guided range of $0.94-$0.98. For next quarter, the consensus estimate of $1.01 will also be beat on an operating basis:

“Our outlook for the second quarter remains positive,” Busse said. “Our current expectation is for earnings to be in the range of $0.95 to $1.00 per diluted share, after taking into consideration an estimated reduction of $0.08 per diluted share due to the redemption of our $300 million 9 1/2% Senior Unsecured Notes.

We had written about the debt redemption earlier, saying “So let’s see: It now has $500 million of debt-financed capital for which it must pay $33.75 million in annual interest expense, compared to the $300 million it used to have, on which it spent $28.5 million.” We didn’t factor the current charge into the equation, but it does little to change the long-term economics of the deal.

In keeping with its larger stature following the Roanoke acquisition, Steel Dynamics also annouced some management promotions.

The stock traded down a bit after the announcement, but we think investors will ultimately find this report to be highly positive.

According to a recent Morgan Stanley - Global Strategy Bulletin:

In a stunning about-face for US trade policy, the US Department of Commerce has just imposed countervailing duties on the imports of coated free sheet paper from China. This could be a warning shot of more to come on the protectionist front.

We aren’t big fans of protectionism, and Morgan Stanley’s article appears concerned about the issue. However, we are big fans of profit opportunities, and we smell what could potentially be a big one for the leading coated paper manufacturers. Consider what happened when the Bush administration imposed steel duties in 2002. Prices went up:

And so did stock prices for steelmakers US Steel (X) and Nucor (NUE).

The pricing power for coated paper has withered away, but we think that will reverse due to the duties imposed:

The question then becomes whether there are stocks that will benefit. The suit that led to the current duties on coated paper was brought by a private company, which does us little good. However, the remaining publicly traded coated paper manufacturers should also benefit. Although it is certainly not a truly clean play, specifically we were thinking of Abitibi (ABY) and Bowater (BOW). The stocks have underperformed due to the poor market for their main product, newsprint, as can be seen from the chart below.

About a third of Bowater’s sales in 2006 were derived from coated and specialty papers. According to the company’s 10K, Bowater is a leading producer of coated and specialty papers and newsprint. It controls 13% of the North American capacity for coated papers, 14% of the capacity for specialty papers and 20% of the capacity for newsprint. It is also a leading producer of paper pulp.

Abitibi, meanwhile, does not produce coated paper but could restart at least one idled mill to produce lightweight coated paper. But in January they agreed to merge with Bowater. According to the Paper Trader:

This union will lift the new company to the position of largest global producer of newsprint in terms of capacity with Norske Skog slipping to second place. AbitibiBowater will command 15% of global newsprint capacity and 47% of North American capacity. This jump in market share could present the first hurdle for the merger to overcome when the companies apply for the required regulatory approval.

The same publication notes:

Although an acceleration in conversions to other paper grades in 2007 is an option, any significant rise in uncoated market share would likely raise concerns with regulatory commissions since Abitibi-Consolidated and Bowater combined already hold a 40% share of North American uncoated mechanical capacity.

That suggests they may move further into coated papers. To be sure, we would rather see more exposure to coated papers and less to newsprint for this play to work. However, the combined companies expect to produce $250 million in cost efficiencies and by concentrating the market share for newsprint may be able to stabilize prices there. If that is the case, the benefits could be two-fold: gains in coated paper as discussed above, and gains in the main newsprint business from consolidation.

Abitibi appears slightly undervalued relative to its share of the combined company. However, Bowater is the company with the coated paper exposure, and the risk of the deal collapsing seems higher than the small discount for Abitibi would make worthwhile.