Worthington Earnings Preview: Can the Steel Stock Beat Expectations Again? – September 28, 2022

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Investors may want to consider Worthington Industries (WOR Free Report) stock with the company set to release its fiscal first quarter FY23 earnings after market hours on September 29.

Worthington Industries is a value-added steel processor, providing customers with wide-ranging capabilities, products, and services for a variety of markets including automotive, construction, and agriculture. 

The basic materials and the industrial products sectors feature multiple inflation-fighting companies.

Companies like Clearwater Paper (CLW Free Report) and lithium chemicals producer Livent (LTHM Free Report) have performed well YTD due to pricing power and the necessity of basic materials. Investors may find a similar pattern and opportunity to hedge against inflation among industrial products like metal and steel, with steel firm Worthington Industries worth consideration at the moment heading into earnings.

Performance

Although WOR is 23% off its highs, it is only down -10% YTD compared to the S&P 500’s -24%. This has also outperformed the Metal Procurement & Fabrication Market with its Zacks Subindustry down -26% year to date. It will be important to see if the company’s products and services were able to continue reaching a diverse market within commercial construction.

During Worthington’s fiscal Q4 earnings call, CEO Andrew Rose said that demand for other types of buildings outside of office buildings was offsetting what was expected to be a decline amongst an economic downturn and rising inflation. Medical buildings and demand in the healthcare field were reasons for the company being cautiously optimistic that its economic environment will hold up.

Image Source: Zacks Investment Research

WOR most recently crushed fiscal fourth-quarter earnings expectations with an EPS surprise of 90% and earnings at $1.58 per share. Plus, over the last two years, WOR stock is up 19% to outpace the benchmark.

Worthington’s performance over the last few years is an indicator that the company may have pricing power as a steel processor despite rising inflation. WOR has also outperformed its Zacks Subindustry during this period, which is down -1% over the last two years.

Outlook

The Zacks Consensus Estimate for WOR’s fiscal Q1 earnings is $1.74 per share, which would represent a -29% decrease from Q1 2022. However, sales for Q1 are expected to be up 10% at $1.23 billion. Management stated operating working capital increased by $258 million during the year mostly due to rising steel prices but the company is expecting a portion of that capital build to return in the form of cash flow in the coming quarters with hopes that steel prices do not continue increasing.  

Year over year, WOR earnings are expected to decline 27% in fiscal 2023, with its FY24 earnings set to drop another 12%. Top-line growth is expected to stall as well, with FY23 sales projected to fall 18% and another 14% in FY24 to $3.65 billion.

Despite the expected decline in the top and bottom line growth, earnings estimate revisions for the current quarter have gone up significantly over the last 90 days.

Valuation 

Trading around $49 a share, WOR has a forward P/E of 9X. This is on par with the industry average of 9.1X and significantly lower than its 24.5X high over the last two years as shown in the nearby chart.

Zacks Investment Research
Image Source: Zacks Investment Research

Also, Worthington Industries is starting to offer value to investors at current levels with a low EV/EBITDA of 4.7X vs. the industry average of 7.4X. WOR’s Price to Cash Flow (P/CF) is also lower than the industry average while its cash flow ratio is higher at 9.46X and indicates the company has generated more cash than needed to pay off its liabilities.  

Last quarter Worthington Industries saw a strong release of cash from operating working capital primarily due to lower steel prices and reduced inventories, which added $77 million to cash flow.

Bottom Line

Investors will be eyeing Worthington’s first quarter earnings to see if the company can beat earnings expectations again and show resilience amidst rising inflation. It is important to note that the stock was up roughly 16% in the following days after blasting fiscal Q4 earnings expectations.

WOR currently has a Zacks Rank #3 (Hold) and the company’s earnings and guidance will give much-needed insight under these uncertain economic conditions. At current levels, the company is starting to offer value to investors and earnings estimate revisions trended upward for the current quarter. For now, patient investors are rewarded with WOR’s 2.57% annual dividend yield at $1.24 a share.

Worthington Industries has also increased its dividend in each of the last five years, which can be attributed to its strong cash flow.

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