Strong results from Worthington’s positions, but earnings fall on one-off adjustments

During the fourth quarter reported net sales of $1.5 billion for the first quarter.
-Net earnings came in at $80.3 million, or $1.61 per diluted share.
— Despite inventory holding losses, Worthington continues to deliver strong results as the building and consumer products segment outperformed.
— Worthington’s products were impacted by semiconductor shortages during the third quarter, which led to volume declines, some of those issues resolved themselves during the fourth quarter.
Worthington Industries (NYSE: WOR)

is a global diversified metals and fabrication company based in Columbus, Ohio. It manufactures a range of steel processing products such as propane, oxygen and helium tanks. It also produces refrigerant, camping and industrial cylinders.
The company continues to see a strong quarter in the form of higher average selling prices across all of its segments and volume growth from recent acquisitions such as Temple Steel and Shiloh fueled revenue growth.


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Market outlook for steel

Steel prices remained high for the quarter, resulting in higher working capital requirements for Worthington. The global steel market remains tight, and steel prices are expected to remain in the $1100-$1700 price range, depending on the type of steel. But, prices may fall below $1000 as demand from countries like China is weakening. Additionally, the global economy is also expected to slow down as tighter monetary policy picks up.

Outlook for Worthington

Major acquisitions added significant revenue to the business as the steel processing unit saw strong demand for the quarter. Worthington is a leading manufacturer of laser welded and electrical steel solutions. Despite the loss from inventory, the steel processing segment generated total revenue of $1.1 billion. Worthington continued to see strong demand in the mobility market during the quarter, and expects demand to remain strong during the next few quarters as well.
The building products segment is facing a challenging outlook as residential and commercial buildings are facing sluggish demand. Mortgage rates have dropped 6% recently, and housing openings have also begun to retreat from their recent levels. Meanwhile, commercial demand also remains weak as trends as workers continue to work from home, creating a glut in the retail property market. But, Worthington continues to do well in this segment and expects its business not to be badly affected. Regardless, as we move into the new fiscal year, questions remain. Investors should expect mid-single-digit growth in the next financial year as the housing market continues to slow down.
Meanwhile, the consumer segment remained solid despite inventory holding losses during the quarter. As a result, the segment witnessed 18% growth for the quarter and over the next few quarters, and demand should also remain stable. In addition, consumer products such as camping gear and helium continue to perform well and are likely to see low single-digit growth during the next few quarters.
Sustainable Energy sales were up 1% for the year and remain weak. Management expects higher selling prices to continue to weigh on the products for the next two quarters. Further, the volumes remain buoyant as there is no moderation in the demand for LPG gas related products.

Financial and Valuation Approach

Total revenue during the quarter stood at $1.5 billion, with revenue steel processing revenue of $1.1 billion. Revenue grew 55% as demand from critical segments remained strong. Gross margin declined marginally due to impact on profits from steel segment margins. Operating profit decreased significantly to $65 million primarily due to adjustments. These adjustments were a result of Nikola’s losses and should not be an issue in the coming quarters. Overall, profitability for the next fiscal should come in around $600-650 million as profitability improves.
Worthington’s stock currently trades at a relatively cheap valuation with a P/E of around 5x. However, the forward P/E should be closer to 3-4x, making the stock very attractive for investors looking to invest in value play.

last word

Worthington faces several risks as its steel processing unit and housing unit face macroeconomic headwinds, but it should be able to address the issues. In addition, the consumer products sector will face fewer issues as the products are less likely to be affected by macro-issues.