Steel Dynamics (STLD) short, mcap=$22bn, price $125 vs $110

STLD short pitch:
– STLD is a steel producer and recycler in the US.
– The company has 3 business segments – steel operations (majority of revenue) and two smaller metals recycling and steel fabrication segments, both historically contributing to around 10% of earnings.
– The latter steel fabrication segment has recently been overearning due to margin expansion caused by increased steel prices and the segment is now estimated to comprise nearly 40% of the company’s 2022 EBITDA.
– Despite management saying “this time is different”, the author argues that margin normalization for this segment is highly likely which is expected to negatively affect STLD’s share price in the near term.

STLD valuation:
– Author assumes STLD’s corp. EBITDA should decline from nearly $6b in 2022 to mid/low $2bns in 2024-2025 (versus $1.3b EBITDA in 2019).
– At 6x historical EBITDA multiple, and after accounting for 2H22-2023 FCF, the target price is around $75-80/share offering a 35-40% upside.

Exp. gain: 35-40%

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