Worthington Industries Slowly Forges Ahead

By Greg Sushinsky | October 05, 2011 AAA

Steelmaker Worthington Industries (NYSE:WOR) posted increased income for its fiscal first quarter, although its revenue fell slightly. Worthington has been spending on restructuring as it's been altering its business, though it benefited from lower general expenses.

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Improving Operations
Worthington earned $25.7 million, or 35 cents a share, compared to $22.4 million, or 29 cents a share, in the year-ago quarter. Revenue, however, was slightly less at $602.4 million compared to $616.8 million in the first quarter last year. According to FactSet, analysts expected 34 cents a share on $630 million revenue.

Revenue was affected by Worthington's deconsolidation of its metal framing and automotive body panels operation. On the positive side, the pressure cylinder division saw a 24% sales gain, aided by the purchase of BernzOmatic, which makes torches, from Irwin Industrial Tool Co., a subsidiary of Newell Rubbermaid (NYSE:NWL). It also bought assets of Misa Metals, Inc. (MMI), a steel processor. The BernzOmatic purchase had been contentious, so resolution of a dispute lowered SG&A charges by $4.4 million. Without the deconsolidation of its metal framing operation, net sales increased 18% due to higher average selling prices, with the average cost of steel rising 16% in the year-over-year quarter. Gross margin was 12% of net sales, compared to 13% in last year's quarter. Without the deconsolidation, however, gross margin would have been 3% higher, while SG&A was actually lower by $11.4 million overall, in part due to the deconsolidation. (For related reading, see Analyzing Operating Margins.)

Steel Still Faces Hard Times
The steel industry has had a difficult time in the weak post-recession recovery, so some context for Worthington's performance is in order. Gross margins have been pressured at other steelmakers. While each of these has a different business mix, it's notable that Worthington's margins, even down a bit from last year, were 12%. Steel Dynamics (NYSE:STD), a scrap and recycled steelmaker, has trailing 12-month gross margins of 11.7%, while Nucor's (NYSE:NUE) was 8%, United States Steel's (NYSE:X) 6.5% and AK Steel Holding's (NYSE:AKS) 4.9%. (For related reading, see Investing In The Metals Markets.)

Even though all have lower gross margins than Worthington, margins aren't close to the total picture of these companies' performance. US Steel with its approximate $3 billion market cap, and Nucor as well, have larger operations than Worthington, but US Steel has struggled more, through the post-recession economic weakness, with losses than the slightly smaller, more specialized Worthington. Another smaller steelmaker like Worthington, Reliance Steel (NYSE:RS) had a terrific second quarter, reported in early August, with revenue up 26% and earnings up roughly 60%. Higher sales volumes and selling prices were the keys. The opportunities in the industry right now seem a bit better for the medium and smaller companies.

The Bottom Line
Worthington has its pressure cylinder segment, so it has a thriving division that's not really dependent on the automotive industry. While the larger steelmakers are tied more heavily into the fortunes of the auto industry, Worthington Industries can still deliver performance in what is obviously a stalled or lackluster economy. With economic growth forecast to be slow going into the coming months, Worthington's business mix should give it a chance to still deliver reasonably good results while awaiting a more general economic rebound. Its stock is selling not that far off its 52-week low, like many of the steelmakers, and is selling at a P/E of 8.96 with a forward multiple of 7.35, which seems cheap. Worthington reflects that the steel industry has been stuck at or near the bottom of the low-demand cycle, but that won't go on forever. (For related reading on the P/E ratio, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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