Steel products maker BlueScope Steel Limited (ASX: BSL) posted record first half underlying earnings this morning that was ahead of guidance and is promising more growth at its full year.
Shareholders will be hoping that the news will support the sagging BSL share price, which has collapsed 30% since the last reporting season when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has only dipped 2%.
But it's not only the all-time high earnings and outlook that will capture attention. News that two key risk factors that have weighed heavily on the stock weren't enough to derail growth will also be warmly welcomed.
What's eating the BlueScope share price?
The first is the housing construction slowdown in the US and Australia. The second is the US steel spreads, which is the profit margin of steel mills.
The home building indices in the US and Australia have softened significantly over the past six months and a rebound is looking elusive.
Meanwhile, the abnormally high profit margins from US steel makers since US President Donald Trump slapped tariffs on steel imports into the country are easing back.
There's little doubt these issues have taken a bite out of BlueScope's earnings but their impact may not be as big as sceptics have feared.
Record earnings and outlook
Management posted a 62% surge in underlying earnings before interest and tax (EBIT) over the same period last year to $325.4 million – it's best half year performance ever.
The 1HFY19 figure is 14% above what the company posted in 2HFY18. That's significant because management was guiding for a 10% increase.
What's more, it's US business North Star and its Australian Steel division posted strong growth. Its steel products may have some exposure to housing construction, but it's predominantly used in infrastructure, industrial and commercial construction projects.
The two divisions that posted a loss, Building Products Asia and North America and Buildings North America, make up a relatively small proportion of group EBIT (under 12%).
Management is fixing these issues and is expecting to lift EBIT for Building Products Asia and North America by $40 million in FY20 (enough to return it to growth) and noted that sales of buildings (in the Buildings North America division) to industrial, healthcare, manufacturing, warehousing, aviation and energy customers remain strong.
Foolish takeaway
However, investors may be disappointed that BlueScope isn't lifting its interim dividend, which is flat at 6 cents per share.
Management also warned that the current half will be weaker than the first half, which is probably due to weakening steel spreads.
Nonetheless, BlueScope is tipping that full year FY19 underlying EBIT will increase by 10% over last year and its looking at an aggressive expansion of its US business.
BlueScope is a buy in my book as it provides good exposure to a range of sectors in the US and because the stock is cheap.
Naysayers will point out that consensus forecast is tipping a drop in profits in FY20 but I think the bad news is already in the price with the stock trading on a price-earnings of 8 times for that year.
