Buying Calls of Steel Stocks (Part 1): Steel Dynamics, Inc .

Steel Dynamics Inc. (NASDAQ:STLD) with its market capitalization of $4.82B is a steel producer and metals recycler in the United States. The Company operates in three segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations. Steel Dynamics has had a decent bullish run so far this year (relative to peers) and the stock experienced a significant uptrend to obtain support at a new high last week as the chart below shows.

Steel Dynamics

Why Shares of Steel Dynamics Skyrocketed Last Week

Shares of Steel Dynamics skyrocketed last week after the company announced its acquisition of a U.S.-based steel plant from Russian steel manufacturer Severstal. The $1.625B acquisition of Severstal Columbus LLC, located in northeast Mississippi is of particular importance to Steel Dynamics as highlighted below because the acquisition

“Significantly expands Steel Dynamics’ operating base with 3.4 million tons of hot roll steel production capacity through acquisition of one of the most modern mini-mills in North America

Broadens Steel Dynamics’ product portfolio by adding capabilities serving high margin customers in the OCTG and automotive sectors

– Allows Steel Dynamics to build a geographic market position in the Southern U.S. with exposure to growing southern and Mexican industrial manufacturing hubs

– Strong fit with an impressive safety-oriented, non-union operating culture.”

Source: Company Statement

Solid Second Quarter Earnings

Another reason why a bullish bet on Steel Dynamics is smart right now is that the company delivered impressive second quarter results as a testimony to an improving business environment. Steel Dynamics reported net income of $72M or $0.31 per diluted shares on net sales of $2.1B. In the same quarter last year, the company reported net income of $29M or $0.13 per diluted share on net sales of $1.8B. Overall, revenue increase by 15% year-over-year and by 13% sequentially.

More interesting is that all of Steel Dynamics reporting segments reported double-digit year-over-year growth. The Steel segment was up 18%, Steel Fabrication was up 29%, and Scrap revenue increased 14%.

Upside Potential in Manufacturing Going Forward

The Markit PMI manufacturing flash index for July will be released on Friday (August 1) and economists are forecasting the manufacturing data to come in between 55.7 and 57.8, you will remember that the Manufacturing data for June came in at 57.3. In addition, the ISM Mfg Index from the ISM manufacturing survey will also be released on Friday. Economists are expecting a reading between 55.0 and 56.8. You will remember that the June ISM Index came in at 55.3.

A reading below 50 suggests a contraction in manufacturing activities in the economy while a reading above 50 suggests an expansion in the economy. It is interesting to note that increase in home sales, car sales and construction spending will cause manufacturing activities to continue to expand. More interesting is the fact that manufacturing activities is experiencing resurgence globally as the global auto market continues to benefit from emerging auto markets of Asia, Pacific, Middle East and Africa.

How to Trade STLD Options

Call options are a no-brainer for trading options of Steel Dynamics as we expect significant uptrend to kick-off on the stock when the Severstal acquisition starts to pay off. I have a $25 price target on the stock for January 2015; hence, I recommend the STLD Jan 2015 23.000 call (STLD150117C00023000) at the asking price of $0.75.

Photo: Stefano Intintoli via photopin cc

— Daily Option Alerts

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