Steel Dynamics Is Best-In-Class Operator

Per

Guidance modestly exceeded our forecasts, however, as we expected more substantial metal margin contraction to take hold. Additionally, we've raised our enterprise value/EBITDA exit multiple to 7.0 times from 6.4 in order to better align it with our outlook for the company's efficiency in converting EBITDA to free cash flow. Across this metric, Steel Dynamics has emerged as a superior best-in-class operator relative to its U.S. steelmaking peers. Due to slightly higher near-term profits and the exit multiple adjustment, our fair value estimate rises to $23 per share from $21. Our no-moat rating is unchanged.

Having updated our valuation model per management's third-quarter guidance, we've slightly raised our 2017 volume and average selling price forecasts for the steel segment. Additionally, we slightly raised our 2017 volume and margin forecast for the metals recycling segment. Our outlook for the steel fabrication segment is effectively unchanged.

For 2017, we now forecast that Steel Dynamics will generate $1.4 billion of adjusted EBITDA and adjusted earnings of $2.59 per share on revenue of $9.5 billion. These estimates are roughly in line with consensus. Over a longer time horizon, however, we maintain a negative outlook for the broader U.S. steelmaking industry as decelerating gross capital formation in China weighs on steel prices and metal margins contract. Additionally, we remain skeptical that trade cases and a potential Section 232 filing will materially improve the operating environment and, instead, we expect import volumes to remain elevated.

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