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Schnitzer Steel: Fabricating A Metal Legacy
Schnitzer’s Steel Industries (SCHN) founder, Sam Schnitzer, started the business under the moniker Alaska Junk Company, as a one-man retail scrap metal operation. Mr. Schnitzer literally built the business on his back, as that is how he is rumored to have distributed his products in those days. As the business evolved, Mr. Schnitzer’s sons took the reins of the company, incorporating it in 1946 under its current name. Over the next 47 years the company would expand its operations through growing sales, strategic acquisitions and partnerships, and the natural progression of the steel fabrication and recycling industry as a whole. In particular, the rise in the number of smaller electric arc furnace steel mills across the nation since the 1970s helped propel Schnitzer’s business, as demand for scrap and recyclable metal continued to increase. In addition, the company’s most notable ventures were its acquisitions of Cascade Steel Rolling Mills, Inc. in 1984, and steel scrap recycler Proler International in 1996 which included a major joint venture with Hugo Neu Corp. that helped to catapult Schnitzer’s recycling business to the top and establish a stronger global footprint.
At present, the largest share of the company’s business comes from the recycling of both ferrous and non ferrous scrap metal (74% of 2009 sales); the other segments include a retail used auto parts business (13%) and the manufacturing of high-quality finished steel products (13%). The company’s business model is highly sensitive to changes in steel prices. As steel prices rise, the upside profit potential is greater because the cost of scrap metal is relatively constant. However, on the downside, if steel prices fall, the company’s gross margin will likely decline under more pressure, as revenues stumble and the cost of source materials remains the same. Other potential macroeconomic hurdles are fluctuations in the U.S. dollar, due to the company’s heavy international exposure, government regulations on international steel trade, and stricter environmental policies.
Nonetheless, Schnitzer is one of the three largest crude steel producers in the world. Its biggest competitors include US Steel Corp. (X), Nucor Corp. (NUE), and Steel Dynamics, Inc. (STLD). Although the recent recession led to a severe decline in the company’s sales, profits and stock price, industry fundamentals suggest that the sector is rebounding. At $40 a share, the equity is still well off its 52-week high of $62.52, not to mention a fraction of its record peak of $118.60 in 2008. Moreover, the company has a low debt-to-capital ratio and a fair amount of free cash to fund planned growth initiatives.