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The 25-Year-Old Stock Rookie: Sizing up a company by the numbers

By Jens Odegaard on August 1st, 2011 • stock market, Stocks, Investing
Originally appeared in: Fall 2011Starting Line

I'm a hands-on person. If I want a new bookcase, I make it. If my 4Runner needs new spark plugs, I bust out the socket set and get to work. So when it comes to investing in the stock market, I don’t want to hand over control to a fund manager. I want to add some personally picked stock to my mutual fund only portfolio. It's time to research a publicly traded company and see if its stock is worth my money.

In good company

I want a company that resonates with me--it’s easier to stay interested in a company you believe in. I have two criteria in mind. It needs to be Northwest local (I live in Oregon) and to produce a physical product (I want to see my investment paying for something tangible).

Schnitzer Steel (publicly traded on the Nasdaq as stock symbol “SCHN”) is based in Portland, Oregon. It has specialized in metal resale since 1906 and merges sustainability with manufacturing.

Schnitzer Steel Divisions

Metal Recycling: Collects and processes junked cars, demolished bridges, and other industrial metal scrap and sells it to mills worldwide.

Manufacturing: Recycles scrap metal into new steel products like rebar and merchant bar.

Auto Parts: Resells used parts from the vehicles it collects. The metal parts that aren't resold are processed for steel mill use.

Financials

Schnitzer fits my first two criteria, but next comes the biggest test: is it financially strong? The answer comes with a little late night sleuthing… of readily available public information. Namely, checking its income statement, balance sheet and cash flow--together known as "financials."

The CliffsNotes versions would look like this:

    • Income Statement--Shows how, and how efficiently, Schnitzer makes money.
    • Balance Sheet--Details what Schnitzer owes and owns.
    • Cash Flow Statement--Shows where its cash comes from and where it goes.

I find all three financial statements by searching "Schnitzer" at google.com/finance. Because I want a wider view of Schnitzer's financial health, I use the 2010 annual statements rather than the quarterly versions.

1. Income statement. The income statement reveals Schnitzer's revenue, expenses, profits and losses.

Net income. At the end of the fiscal year, Schnitzer had netted nearly $66.75 million in income. That's a rebound from 2009 when profits tanked, but still not as good as 2008 and 2007.
 
Year      Net Income
2007      $131 million
2008      $249 million
2009     -$32 million
2010      $66.75 million

Gross profit margin. $281.5 million gross profit ÷ $2.3 billion revenue = 12% margin.

This means that for every dollar in revenue, Schnitzer receives $0.12 of gross profit. Comparing its gross profit margin with a few competitors, Sims Metal Management (19%) and Commercial Metals Company (6%), shows that it is holding its own.

Dividends. Schnitzer paid dividends of $0.07 per share in 2010. Dividends are payouts of the company's earnings separate from stock price fluctuations. My wallet is intrigued, because it means that Schnitzer stock can pay off in two ways.

2. Balance sheet. The balance sheet compares Schnitzer's assets (things it owns) to its liabilities (debt) and shareholders' equity (money from investors and earnings Schnitzer holds onto). Why do I care? A company with not much extra money is more vulnerable if costs increase, and with a couple of calculations I can find out where Schnitzer stands.

Working capital. $461 million current assets - $160 million current liabilities = $301 million working capital.

This means that Schnitzer could easily pay off short-term liabilities if needed.

Debt-equity ratio. $368 million total liabilities ÷ $975 million shareholders' equity = 38%.

That number is well below one, which tells me Schnitzer is not highly leveraged. It has 38 cents of debt for every $1 in equity. That's healthy.

3. Cash flow. The cash flow statement has three main sections: operations, investing, and financing. Schnitzer makes money from operations (selling steel, auto parts, etc.), raises money from financing (issuing new stock or bonds), and spends money by investing in company growth.

The key is to see if Schnitzer can pay for its investments with money from operations.
$89.5 million earned from operations - $64.3 million invested back into company = $25.2 million. Schnitzer has money to spare.

In addition, Schnitzer’s financing number was -$35.7 million, because Schnitzer paid dividends, paid off debt, and bought back stock (reducing the number on the market, which helps keep value high). That's good for shareholders.

Stock chart

After checking the financials, it's time to glean some info from Schnitzer's stock chart. There's a plethora of information, but it's in code (thank you, investopedia.com and moneychimp.com for helping me understand). Here's how to decipher the riddle:

Nasdaq. The first thing I look at is how Schnitzer's stock compares to the Nasdaq Composite index (which tracks all Nasdaq stocks) over the past five years. Schnitzer consistently outperforms the index, which means it's doing better than average.

P/E. The day's opening price of $60.18 divided by the earnings per share (EPS) of 3.27, equals 18.4. I pay around $18 for each $1 of current earnings. That's not bad, as it's about market average.

52 week. This gives me an idea of a reasonable price for the stock based on a range of recent values. Right now the stock is trading at $61.50, well up from its 52-week low of $37.00, but lower than the height of $69.43.

I don't limit my range of analysis to only one year, however. By changing the zoom on the stock chart from 1 year to 5 years, I see that the 5-year low is $18.45 and the high is $111.35. The current price of $61.50 looks pretty good.

Beta. Schnitzer's beta is 1.93, which means that the stock price is 93% more volatile than the market as a whole. There is more of an opportunity to make (or lose) money.

Mkt. Cap. This shows the total value of Schnitzer's stocks. Schnitzer's market capitalization is $1.69 billion, which means Schnitzer is a small cap company (companies with less than $2 billion). As a small cap, Schnitzer has higher growth potential and risk than a large cap company.

Overall, Schnitzer is looking pretty good, but I can't even consider buying stock without opening an investing account. I hit up consumersearch.com and search "online brokers." TradeKing is rated the best discount broker and the flat rate of $4.95 per trade (buying and selling), no minimum balance requirement, and no hidden fees sounds good to me. I'm in.

Editor's Note: This is a quarterly publication, and as such, there could be significant information, news, or price changes that may differ from resources available at the time this article was written in February 2011. All analysis is meant for educational purposes and is not an investment recommendation. You should not make decisions based on information contained in this article without the advice of a qualified professional advisor.

The Bottom Line

After checking Schnitzer out, I decided to personally purchase two shares of Schnitzer stock. To keep on the legal up-and-up, I need to tell you that this article and analysis is not a recommendation, but rather is intended as an educational example to show how to begin researching stocks.

Sources: google.com/finance; schnitzersteel.com; wsj.com; fool.com; moneychimp.com; investorguide.com; moneycentral.hoovers.com

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