Tickers in this Article: STLD, AA, NUE, AKS, PKX, MT, FLR
Just how healthy is the economy, anyway? Retailers have been seeing shoppers return to their stores, and railroads continue to see carload volumes increase, but banks are still struggling and non-residential building is all but asleep. Even aluminum is no help - Alcoa (NYSE:AA) is doing better, but some of that is because of more rational Chinese producers and a recovery in aerospace. It is a very muddled picture, then, for Steel Dynamics (Nasdaq:STLD) as this large mini-mill operator moves into the final quarter of the year.

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The Quarter That Was
Steel Dynamics had previously guided third-quarter numbers down, but nevertheless managed to deliver results on the upper side of that range. For a "tough" quarter, sales were surprisingly strong - Steel Dynamics reported 35% revenue growth over last year on 5% higher shipment volume. On the other hand, sequentially, Steel Dynamics saw revenue fall 3% on 4% higher shipments.

Unfortunately, the company saw a decided absence of operating leverage this period. Overall operating income dropped by more than half, as both the steel operations and metal recycling business saw sharp declines in operating profits.

The Road Ahead
Based on management's outlook, investors might want to get accustomed to this muddle-through economy. Although they do not see much risk of a true double-dip, it does not sound like this sluggish recovery is going to pick up the pace any time soon. That viewpoint is probably going to be just as valid for other U.S. steelmakers like Nucor (NYSE:NUE) or AK Steel (NYSE:AKS), so investors may need to just sit tight and hope for a stronger 2011, or perhaps consider steel companies with more foreign exposure like Arcelor Mittal (NYSE: MT) or POSCO (NYSE:PKX). (For related reading, see Steel Dynamics Pitted, But Not Rusting.)

By the same token, it is hard to see how Steel Dynamics really thrives again unless and until non-residential building picks up. True, some of STLD's steel goes into cars, trucks, heavy machinery and so on, but construction is a major consumer. It may make sense, then, to keep an eye on the big engineering and construction firms like Fluor (NYSE:FLR) and Jacobs Engineering (NYSE:JEC) - not because they are big direct customers of STLD, but rather because they are good bellwethers for the health of large-scale non-residential construction. When they start seeing better conditions, it seems reasonable to think that STLD will see more demand for structural steel.

The Bottom Line
Even if current conditions are lackluster, Steel Dynamics has proven its mettle over past cycles. The company is profitable, run by shareholder-friendly management, and has a competitive cost structure. There is little reason to think that this stock will be an outperformer in the short-term, but the company should do well over a full economic cycle and the stock will come to life as that happens. (For more, see 7 Ways To Position Yourself For Recovery.)

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