Why BlueScope Steel Limited shares are going crazy today

The BlueScope Steel Limited (ASX: BSL) share price is going gangbusters today, up 13.7% at the time of writing. The reason is that the company announced it expects earnings before interest and tax (EBIT) to be at least $510 million for the first half of 2017.

This compares favourably with underlying EBIT of $570 million for the whole of 2016 and is particularly impressive given there is currently a global oversupply of steel.

The strong performance is driven by productivity gains and a full year of ownership of Ohio-based North Star, despite higher raw material costs. The recent election of Donald Trump could be a positive for North Star as Trump has repeatedly promised to reinvigorate US industry.

Perhaps most importantly, the company is generating strong cash flows and consequently reduced net debt by $595 million in the half ending June 2016.

Bluescope’s strategy is to become the leading global supplier of painted steel products for the building industry which differentiates it somewhat from a standard steel manufacturer. It is aiming to establish several premium brands that can provide it with pricing power which could make it a more attractive investment proposition than the typical steel maker.

Overall, Bluescope’s current performance is impressive given the state of the steel industry and its differentiation strategy seems to be a good one. However, the company is not only vulnerable to coal and steel prices, but is also dependent on the building industry.

Many think that Australia is in the midst of a housing bubble and if they are right then Bluescope could be headed for rough times along with the rest of the construction industry.

On the other hand, based on today’s update the stock is trading on a single-digit (estimated) forward price-to-earnings ratio (PER), so perhaps the risks are already priced in. Furthermore, the company’s continued international expansion reduces its exposure to the construction cycle in any one country.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. 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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