Insights

Why Algoma Steel Stock Popped on Wednesday

What happened

Shares of Canadian steel company Algoma Steel Group (NASDAQ: ASTL) exploded 18.5% higher on Wednesday morning (as of 10:45 a.m. ET) after beating analyst forecasts for its fiscal Q4 and full-year 2022 earnings.

Heading into the report, analysts expected Algoma to report a $1.57-per-share profit on sales of $961 million in Q4. Algoma fell short on the revenue forecast, collecting only CA$941.8 million. Nevertheless, the company “beat earnings” with a per-share profit of $1.59.  

So what

Sales surged 47.5% year over year in the final quarter of Algoma’s fiscal year. It’s worth pointing out, by the way, that while financial data sites aren’t clear on the matter, the analyst estimates were probably and Algoma’s results were definitely prepared in reference to Canadian dollars, which are worth about $0.77. Thus, in USD, Algoma’s revenues for the quarter were only $725.2 million.  

Similarly, revenue for the full fiscal year, which was reported at $3.8 billion (up 112% year over year), works out to only $2.9 billion in USD.  

On the bottom line, Algoma’s net profits more than doubled to CA$242.9 million (i.e., $187 million). For the full year, profits were CA$857.7 million (i.e., $660.4 million). That’s a big improvement from fiscal 2021 results, in which year Algoma lost money.

Now what

Algoma CEO Michael Garcia characterized the results as “incredible” for his company, noting that revenues, profits, and cash flows all set new records for Algoma. He also seems to think the good times are here to stay and is making substantial bets in that direction.

Among these bets, Algoma is spending $400 million (and this number is in USD) to buy back Algoma stock as part of the company’s plan to retire up to 5% of its common stock. This reduction in share count will tend to concentrate Algoma’s profits among fewer shares outstanding — assuming the stock remains profitable. If economic conditions turn south, however — say, in the event of a recession — and Algoma resumes losing money, fewer shares outstanding will concentrate those losses as well.

That’s a risk investors should think about, but with Algoma steel stock currently selling for just two times trailing earnings, it’s a risk investors should seriously consider taking to own a piece of this value stock.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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