When you look at companies such as US Steel (X-NYSE), Alcoa (AA-NYSE), Rio Tinto (RTP-NYSE), Alcan (AL-NYSE) and many other giants in the metals sector either in the midst of or rumor to be in a merger, it just makes you wonder if there are many much smaller companies that have been overlooked.
We are running 4 or 5 niche-oriented stocks in the metals sectors and this is the first of the series. Gone are the days that these can be found at 6-times earnings, so the "cheap" term has to be thought of in the light that we are in a metals world driven by foreign demand and further driven by merger speculation. We are only focusing on companies that have niche businesses or operations that make them seem attractive or cheap on their own merits.
Olympic Steel (ZEUS-NASDAQ) $33.30 (-2%l -$0.71); 52-week trading range $21.03 to $39.49. This trades for what is probably going to be 10-times forward earnings and about 1.5-times book. There is very little hidden kicker in the company like cash hoards or easily spotted assets that are grossly undervalued. It’s pretty straight forward. This is thin volume and thinly covered, which you’d expect for a player with a $350 million market cap. Its earnings consistency has been sporadic and it has grown its top-line at roughly 5%. Revenues were $981 million in 2006.
Before getting excited about Olympic just as a buyout candidate, keep in mind that insiders hold close to 20% of the stock and Goldman Sachs, Barclays, and Dimensional each hold another 9% on average. So if the holders don’t want to sell no matter what then it will be impossible to force a deal. This should be looked at on a standalone basis because speculating in stocks just for the hope of a buyout is not a good enough reason to own a stock.
The company is also very subject to economic cycles and it is more involved in basically forging the steel into whatever manufacturers, transporters, infrastructure operators, machine makers, and the like need for their process. So while it has facilities, it is not one that benefits from rising metal prices because it is not a miner. You might even refer to them as a manufacturer’s manufacturer. They partly transformed themselves last year with an acquisition and the company has not come close to having too much market share.
More detailed information can be found on them on their website.
Jon C. Ogg
May 10, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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