Unfortunately for its shareholders, the Sims Metal Management Ltd (ASX: SGM) share price has had a disastrous start to the week.
In morning trade the scrap metal company's shares are down almost 16% to a 52-week low of $9.22.
Why is the Sims Metal Management share price being crushed?
Investors have been hitting the sell button in a hurry this morning after Sims Metal Management released an earnings update to the market.
According to the update, management expects its first half underlying earnings before interest and tax to be approximately $110 million, based on its preliminary results.
As you might have guessed from the share price reaction, this has fallen short of expectations and will be a 12% decline on the prior corresponding period.
Managing director and CEO, Alistair Field, advised that the company has struggled due to challenging conditions, but remains optimistic on the company's long-term prospects.
Mr Field said: "The first half has been challenging for all recycling companies globally and will continue to be so for the near future. We are meeting these challenges and will maintain our focus on capitalising on our strengths and on improving underperforming businesses. I am confident that our strategy of producing high quality products that better meet the needs of our customers is key to our long term success."
What now?
Based on a recent note out of Goldman Sachs, its analysts expected Sims Metal Management to achieve full year earnings before interest and tax of $314.2 million in FY 2019, up 4.7% on FY 2018's result.
Given its poor first half performance and the fact that these challenging conditions are expecting to continue in the near term, it seems very unlikely that the company will come close to meeting the broker's estimates.
Should you buy the dip?
Based on the assumption that this level of underperformance is maintained in the second half and the company reports a 12% decline in earnings per share, Sims Metal Management's shares are currently priced at 11x forward earnings.
At this level it could make it a decent option for a turnaround candidate if trading conditions improve in time for FY 2020.
But for now, it is a little soon for an investment for me and I would sooner buy the shares of materials sector peers BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
