Stressed Out: Shareholders Overreacted to TimkenSteel's Earnings Beat

 | Feb 01, 2016 | 11:30 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.


As Real Money reported, the big U.S. steelmakers are getting hammered, and it looks like problems will persist through 2016.

But TimkenSteel (TMST) temporarily proved to be an outlier, surging 73% after last Thursday's earnings beat that revealed a increased drive to slash costs and offload inventories.

But shareholders' enthusiasm may have been overhyped.

TMST shares traded down some 20% Monday, putting the Canton, Ohio-based producer back in line with its struggling peers U.S. Steel (X) and AK Steel (AKS), all trading down between 7%-10% year to date (and members of Real Money's distressed watch list.)

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Last year, as steelmakers began idling their mills to meet cheaper prices and fewer orders from energy and power customers, TimkenSteel was able to slash its capital spending by 40% (and the company aims to repeat that target this year).

"In 2015, we faced many hurdles, but also some new exciting opportunities," CEO Ward Timken said on last week's earnings call, which topped Wall Street's estimates by 14%. "Fourth quarter demonstrates that we're handling both effectively."

But investors appear to be returning to their dire forecasts across the industry, especially given TimkenSteel's 8x leverage ratio, a measure of its debt burden, based on roughly $200 million in debt and track record of burning cash in each of the last four quarters.

Of particular concern for TimkenSteel is its heavy exposure to a customer base of energy and heavy-machinery companies, which have been under the most stress amid declining prices of oil, according to Philip Gibbs, an analyst with KeyBanc.

The domestic utilization of steel mills will likely wallow in the 55%-65% range this year, but TimkenSteel will likely be hit harder "given outsized exposure to the most challenged end markets," Gibbs wrote in a KeyBanc investment note Monday.

On the subject of original equipment manufacturers of heavy machinery reducing their steel orders, compounding the pressure of declining oil-and-gas customers, Timken said Thursday that the market is still under stress.

"I think they're still seeing commodity markets under a lot of pressure and that now translates through to your big yellow trucks," he said on the earnings call. "At this point, I would say that, in a lot of these markets it's hard to imagine them going a lot lower, but I think we've all been surprised.

TimkenSteel is rated a D- by TheStreet's Quant Ratings service, with a "sell" recommendation. TheStreet's analysts base their recommendation on "deteriorating net income, disappointing return on equity, poor profit margins, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: 3-D Printing and Semiconductors Are Getting Slammed

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Why the Big Steelmakers Are Tanking Today

Stressed Out: Is Avon Using Vanishing Cream on Its Cash?

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

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