Businesses like Olympic Steel (ZEUS) can be tough to value and invest in successfully because the business cycles can be quick and brutal. Customers are scrambling for steel products today, and steel mill lead times have blown out to two months or more, but at some point the demand will slow and the great margins that Olympic is posting today will reverse as higher-cost inventories work their way through.
I’m looking for Olympic to maintain around 4% peak-to-peak annualized long-term revenue growth as the company continues to expand and build up its Specialty Metals and Tubular businesses, but there will be wild swings along the way, as 25% or greater peak-to-trough movements are commonplace. Moreover, while I do believe Olympic will find some success in its efforts to improve long-term margins, the reality is that the trailing EBITDA margin of 2.5% and trailing FCF margin of about 1% are what they are and the company is almost certainly going to see some reversion to the mean over the next couple of years, even if the mean is higher than it has been in the past.
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Olympic Steel Prospering On Recovery Demand, But Normalization Could Whipsaw Investors
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