On paper, steel and coal producer EVRAZ (LSE: EVR) looks attractive. Quality indicators seem to be robust with the firm’s percentage return on capital running in the mid-20s and the operating margin a little over 18%. At today’s 555p share price, value indicators show the forward price-to-earnings ratio for 2018 at a little under seven and the forward dividend yield just above 8%. Meanwhile, the stock has moved up a long way since its lows during early 2016, indicating strong momentum. But can all this positivity endure?
It’s mostly about steel
EVRAZ describes itself as “a vertically integrated steel, mining and vanadium business with operations in the Russian Federation, USA, Canada, Czech Republic, Italy and Kazakhstan.” Today’s half-year report reveals that during the first six months of 2018 the firm generated around 78% of its revenue from steel production, 18% from coal and 4% from other operations, so what the company earns from steel will have a big impact on the financial results. Some 36% of overall revenue came from Russia during the period, 22% from the Americas, 21% from Asia and 21% from the rest of the world including Europe. The market for products from Evraz has grown far beyond the firm’s Russian origins.
As well as mining the iron ore and making steel from it, Evraz turns out products for the construction and infrastructure market such as those used to erect buildings and bridges, and is one of world’s largest producers of rails and wheels for trains. The figures in today’s report are good with free cash flow up more than 20% compared to a year ago, consolidated earnings before interest, tax, depreciation and amortisation (EBITDA) more than 65% higher and net debt down 2.5% to $3.9m. This left the net debt-to-EBITDA ratio at 1.1, which the company reckons is below its target.
Market prices set to decline
Chief executive Alexander Frolov said in today’s report that the good outcome in the period was supported by “the ongoing improvement in the global steel market environment.” However, I think that is the main consideration when investing in EVRAZ. Commodity prices are out of the firm’s control, which makes the company highly cyclical. I certainly wouldn’t be looking at EVRAZ today and weighing it up as a dividend-led investment. City analysts following the firm expect the overall level of dividend payments to fall during 2019. That’s not surprising because the company said in its 2018 year-end outlook statement that it expects market prices to decline in the second half, “particularly international coal and steel benchmarks.”
Generally though, the directors seem relaxed about the outlook and said the overall financial performance should “remain solid” because of the pipeline of internal improvements and a strong pricing environment “relative to the average levels seen in the last three years.” However, I reckon the huge rise we’ve seen in the share price since 2016 increases the risk of investing in EVRAZ now, despite the firm’s tasty-looking quality, value and momentum indicators, so I’m looking elsewhere for a home for my capital.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.