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By Jason Stipp | 09-30-2010 02:07 PM

Don't Overlook These Steel-Plated Bonds

A slow recovery has left Steel Dynamics' bonds attractively priced.

Securities mentioned in this video
STLD Steel Dynamics Inc

Jason Stipp: I'm Jason Stipp for Morningstar. Our research team recently uncovered an interesting bond opportunity in the steel sector. I'm joined today by Min Tang-Varner, she's a securities analyst; and Bridget Freas, she's an equity analyst covering the steel sector. They are going to tell me a little bit about what they found that maybe the market is missing.

Thanks for joining me.

Bridget Freas: Thank you.

Min Tang-Varner: Thank you for having us.

Stipp: First question for you, Bridget. You cover the stock, it's called Steel Dynamics. Steel industry, I think, is one that a lot of folks have some preset ideas about. Is this company, you know, it fits the mold of the steel industry or is it sort of a new generation of the steel company?

Freas: It definitely is a new generation steel player. It is one of the smaller of the major U.S.-focused steel companies and when we think of steel, a lot of times we just think construction markets. They are a lot more diversified, big presence in automotive, and appliance and machinery.

But I think the big thing to know about Steel Dynamics is they really are a low-cost player in the industry. They are very efficient steel making plants, very flexible way of operating, which is very important in sort of a volatile market as it is now, and they also source a lot of their raw material internally. So it gives them a lot of control over their input costs, and it enables better margins then you typically see in steel.

Stipp: So, definitely because they've adapted somewhat to what the environment is in their industry. Still though, I think steel is very highly cyclical and sensitive to the economy. We haven't kind of going through a bumpy recovery recently. What is Steel Dynamics' results looked like and what does that sort of tell us about what the operating environment today has been for the company?

Freas: Right, very volatile, highly cyclical, definitely and the whole steel market in general is coming off of just a disastrous 2009. For the company, their sales fell 50% and they reported just a very small loss for the year, but that was actually a lot better than a lot of firms out there did. But we've kind of turned the corner. They've reported positive results in the first two quarters of the year. So, I think we're past the bottom, but it's definitely been a rough time in the past couple of years.

Stipp: So if we're going to be talking about, just coming to these bonds obviously we want to get a sense of its balance sheet. Can you tell us a little bit about what it looks like and what is – compared to recent history, where they were and where they are now?

Freas: Sure. Well, they had a couple of major acquisitions that they've funded through debt back in 2007 and 2008. So they added about $1.5 billion to their debt and given the drop in earnings in 2009, they haven't been able to pay that down. So they are pretty highly leveraged right now, and their current debt to EBITDA on a trailing basis is about five times.

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