Why Steel Dynamics (STLD) Was Upgraded

Updated at 9:40 a.m. to reflect market activity.

NEW YORK (TheStreet) -- Steel Dynamics (STLD) was upgraded to "buy" from "neutral" by Bank of America/Merrill Lynch Tuesday.

Steel Dynamics gained 3.9% to $16.94 in morning trading.

The bank says the upgrade is a valuation call as the stock has gained 16% year-to-date. Analysts also note that Steel Dynamics generates a strong cash flow.

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Separately, TheStreet Ratings team rates STEEL DYNAMICS INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate STEEL DYNAMICS INC (STLD) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • STLD's revenue growth has slightly outpaced the industry average of 1.9%. Since the same quarter one year prior, revenues slightly increased by 9.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • STEEL DYNAMICS INC's earnings per share declined by 11.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, STEEL DYNAMICS INC increased its bottom line by earning $0.83 versus $0.73 in the prior year. This year, the market expects an improvement in earnings ($1.27 versus $0.83).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Metals & Mining industry and the overall market on the basis of return on equity, STEEL DYNAMICS INC has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • STLD's debt-to-equity ratio of 0.83 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.14 is sturdy.
  • In its most recent trading session, STLD has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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