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This has been a tough year for steel companies. Squeezed between rising costs and iffy demand, the sector has largely been treading water. With better than expected results for the second quarter, maybe the turn is at hand for Steel Dynamics (Nasdaq:STLD). Then again, considering a glut of sheet steel and the company's spot pricing exposure, the Street may be slow to fully climb on board this name.

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A Better Quarter ... Sort of
There are two ways to think about Steel Dynamics' quarter - it was much worse than initially expected, but at least better than the company's pre-announced guidance. Revenue rose more than 27% this quarter, with tons shipped rising 15% and all steel products up a little more than 14%. Shipments were especially strong in categories like structural, rail and steel bar.

Profitability was not only better than a year ago, but also better than analysts were expecting. Gross margin rose 150 basis points, while operating income rose more than 61%. While scrap costs were higher, the company's price realizations more than doubled this scrap price increase. All in all, per-ton operating profit rose more than 40% from the year-ago period.

Better Days Ahead?
There are so many applications for particular steel products, it is hard to make direct lines between Steel Dynamics' results and particular industries. For instance, Steel Dynamics saw strong bar shipments, but bars are used in axles, door frames and rebar, just to name three applications. So, a good market for bars could be good for any number of industries, but it is most likely good news for other major bar producers like Nucor (NYSE:NUE), Commercial Metals (NYSE:CMC) and Gerdau (NYSE:GGB).

That said, Steel Dynamics is seeing better demand in core markets like automobiles, transport, energy, industrial and even construction. It's not so surprising, then, to see good performance in that structural and rail line item. Steel Dynamics is one of the larger suppliers of rail alongside ArcelorMittal (NYSE:MT), and companies like Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC) have been spending more on capex during this cyclical upturn.

Play Safe or Go for the Big Win?
If economic activity picks up and steel price increases outpace input costs, Steel Dynamics could be a big winner. Keep in mind, too, that it is a generally well-run company that sources about half of its own scrap needs and should see margin improvements from the Mesabi project.

On the other hand, Steel Dynamics is a small player (less than 6% of U.S. capacity) and has its vulnerabilities. That puts a few other ideas in play. Nucor is perhaps the best-run steel company, period, though it trades at a premium to STLD. ArcelorMittal is a great traditional steel company with a global footprint and solid internal sourcing assets (due in part to deals like the recently-announced partnership with Peabody Energy (NYSE:BTU) to buy Australia's Macarthur Coal).

Investors can also consider names like Schnitzer Steel (Nasdaq:SCHN), a company poised to be a consolidator in scrap processing. Likewise, options like Allegheny Technologies (NYSE:ATI), Carpenter (NYSE:CRS) and Reliance Steel (NYSE:RS) offer a play on stronger markets like aerospace and energy. (For related reading, see Investing In The Metals Markets.)

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