Why BlueScope Steel Limited shares are soaring today

Aussie steel producer BlueScope Steel Limited (ASX: BSL) is enjoying strong trade today. The BlueScope share price has rocketed by more than 13% in early trade. BlueScope’s market value is now close to a 12-month high.

Today’s price action caps a pleasing seven months for BlueScope in which its market value has grown by more than 77%. Is there enough steam left in this rally for you to profit if you invest now?

Why Did This Happen to BlueScope Shares? 

This morning, BlueScope announced preliminary unaudited earnings for the six months ending 31 December 2015. Before tax, BlueScope expects that underlying earnings were around $230 million.

Although we won’t see BlueScope’s audited result for another 10 days, today’s announcement effectively represents a $50 million upgrade to BlueScope’s prior guidance for earnings in the period of around $180 million.

Before today, the market’s consensus expectation was for BlueScope’s earnings before interest and tax for the year ending 30 June 2016 to be around $335 million. Today’s news will likely push those estimates up.

BlueScope has grown its profit margin by cutting costs and growing domestic volumes. It’s clear that the deal BlueScope struck with unions and the NSW government in October last year to stop the Port Kembla steelworks from shutting has helped to boost the firm’s profitability.

Events abroad have also helped BlueScope. According to the China Iron and Steel Association, Chinese steel mills lost a cumulative US$7.3 billion in 2015 as steel prices collapsed and domestic demand spluttered.

BlueScope’s competitors in China have responded by cutting production. UBS reports that Chinese steel output fell by an annualised 6% in December. Anecdotally, today’s volatile economic environment is making it hard for many Chinese steel mills to obtain financing.

These industry dynamics are positive for regional steelmakers like BlueScope. That explains the market’s strong approval of BlueScope’s profit upgrade today, which has sent its share price soaring.

What’s Next for BlueScope Steel Limited? 

It’s tempting to assume you’ve missed the boat when you see a large stock rise by more than 10% in a day. But you should remember that BlueScope shares are still rising off a relatively low base.

Although BSL shares have risen to around $5 today, less than two years ago they traded at more than $6.50 apiece. Before the cycle turned down for Australia’s resources industry in 2011, BlueScope shares were worth much more.

BlueScope’s self-help initiatives around cost cutting should continue to underpin solid earnings. Many of its competitors in China are running at a loss, and there’s plenty of scope for investor sentiment on BlueScope to continue to improve. That means this big Aussie steelmaker is worth close consideration.

Foolish takeaway

Today’s news on BlueScope reveals that it’s not all doom and gloom in the Aussie materials sector. Industries like steelmaking will never go away entirely…and if you can pick a relative winner and invest while profitability is rising, you could set yourself up to make rapid gains.

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Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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