harris steel group
DESCRIPTION
Harris Steel Group. Group Project BFIN 241 – Finance for Managers 3rd April 2007. Background. Founded 1954, Public 1967 Quarterly Dividends Paid since 1972 Industrial reinforcement materials Fabrication/placing of concrete reinforcing steel Welded Wire Mesh Industrial Steel Grating - PowerPoint PPT PresentationTRANSCRIPT
Harris Steel GroupHarris Steel Group
Group ProjectGroup Project
BFIN 241 – Finance for BFIN 241 – Finance for ManagersManagers
3rd April 20073rd April 2007
BackgroundBackground
Founded 1954, Public 1967Founded 1954, Public 1967 Quarterly Dividends Paid since 1972Quarterly Dividends Paid since 1972 Industrial reinforcement materialsIndustrial reinforcement materials
Fabrication/placing of concrete Fabrication/placing of concrete reinforcing steelreinforcing steel
Welded Wire MeshWelded Wire Mesh Industrial Steel GratingIndustrial Steel Grating Concrete post-tensioning systemsConcrete post-tensioning systems
InstallationInstallation
BackgroundBackground
1500 Employees1500 Employees 44 facilities in Canada and United 44 facilities in Canada and United
StatesStates Products and services delivered Products and services delivered
through Harris Rebar, Laurel Steel and through Harris Rebar, Laurel Steel and Fisher & LudlowFisher & Ludlow
Serves all of Canada, eastern, central, Serves all of Canada, eastern, central, western United Stateswestern United States
Recent EventsRecent Events
January 24, 2004, Nucor Joint VentureJanuary 24, 2004, Nucor Joint Venture Merger bid January 2, 2007Merger bid January 2, 2007 Offered 1.25 Billion CADOffered 1.25 Billion CAD Stock rose $2.56Stock rose $2.56 Nucor paid 46.25 per share (6.3% Nucor paid 46.25 per share (6.3%
more than closing price).more than closing price). Approved by Harris Family (own more Approved by Harris Family (own more
than 50% shares)than 50% shares)
Recent EventsRecent Events
Surging demand for steel spurred Surging demand for steel spurred $78 Billion in mergers and $78 Billion in mergers and acquisitions last yearacquisitions last year
Nucor wants to expand production Nucor wants to expand production of steel rebarof steel rebar
Harris Steel Group biggest producer Harris Steel Group biggest producer of steel rebar in Canadaof steel rebar in Canada
Biggest transaction ever for NucorBiggest transaction ever for Nucor
Recent EventsRecent Events
Second half of 2002 and early 2003 an Second half of 2002 and early 2003 an economic recession in the USA and the economic recession in the USA and the threatening war on Iraq threatening war on Iraq
March 5th 2002 President Bush March 5th 2002 President Bush announced that tariffs ranging from 8-30 announced that tariffs ranging from 8-30 % would be imposed on steel imports% would be imposed on steel imports
Canada and Mexico exempt from these Canada and Mexico exempt from these tariffstariffs
December 4 2003 President Bush December 4 2003 President Bush announced the withdrawal of the steel announced the withdrawal of the steel import tariffsimport tariffs
Recent EventsRecent Events
Merger bid January 2007Merger bid January 2007 Nucor paid 46.25 per share (6.3% Nucor paid 46.25 per share (6.3%
more than closing price).more than closing price). Approved by Harris Family (own Approved by Harris Family (own
more than 50% shares)more than 50% shares)
Sales TrendSales Trend
20022002 $ 528,315,425$ 528,315,425
20032003 $ 516,741,731$ 516,741,731 -2.2 %-2.2 %
20042004 $ 731,536,662$ 731,536,662 +41.6 %+41.6 %
20052005 $ 1,013,197,000$ 1,013,197,000 +38.5 %+38.5 %
Sales per YearSales per Year
-200000000
0
200000000
400000000
600000000
800000000
1000000000
1200000000
2002 2003 2004 2005
Year
$SalesIncrease
Retained EarningsRetained Earnings
2002 retained earnings is $189,519,7852002 retained earnings is $189,519,785 2003 retained earnings is $191,139,2942003 retained earnings is $191,139,294 2004 retained earnings is $257,371,2152004 retained earnings is $257,371,215 2005 retained earnings is $311,499,0002005 retained earnings is $311,499,000
Steady increase over the years in Steady increase over the years in retained earning even though sales retained earning even though sales dropped in the first yeardropped in the first year
Retained EarningsRetained Earnings
0
50000000
100000000
150000000
200000000
250000000
300000000
350000000
2002 2003 2004 2005
Strong CorporationStrong Corporation
Ability to generate cash flows, even Ability to generate cash flows, even in a challenging environment.in a challenging environment.
Record breaking profits in a period Record breaking profits in a period where many competitors were where many competitors were seeking bankruptcy protection.seeking bankruptcy protection.
Balance sheet provides significant Balance sheet provides significant financial flexibility.financial flexibility.
EarningsEarnings
Earnings of $64.1 million in year Earnings of $64.1 million in year 2005.2005.
Many internal and external growth Many internal and external growth opportunities were taken advantage opportunities were taken advantage of.of.
Large earn-out gains from Large earn-out gains from reinforcing operations to Nucor.reinforcing operations to Nucor.
Profit Margin TrendProfit Margin Trend
Profit margin 1996-2005
0%
2%
4%
6%
8%
10%
12%
1 2 3 4 5 6 7 8 9 10
ShareholdersShareholders
Strong policy of returning excess Strong policy of returning excess capital to the shareholders.capital to the shareholders.
50% increase in dividends per share 50% increase in dividends per share last March.last March.
Followed by another increase of 11% Followed by another increase of 11% in December.in December.
DPS were quadrupled in June of 2004.DPS were quadrupled in June of 2004. Single class of common shares.Single class of common shares.
Earnings Per ShareEarnings Per Share
EPS were $2.38 in 2005.EPS were $2.38 in 2005. Dividends per share were $0.37Dividends per share were $0.37 Harris Steel Shareholders have Harris Steel Shareholders have
experienced quarterly dividends per experienced quarterly dividends per share since 1972.share since 1972.
Earnings and Dividends Earnings and Dividends TrendTrend
Earnings and Dividends per share 1996-2005
0
0.5
1
1.5
2
2.5
3
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
EPSDPS
EquityEquity
Shareholder equity grew 119% in Shareholder equity grew 119% in 20052005
Debt is 13% of total assets – directly Debt is 13% of total assets – directly related to volume increases of related to volume increases of businessbusiness
Return on equity was recorded at Return on equity was recorded at 19.59% in 200519.59% in 2005
ExpansionExpansion
Harris Steel is increasingly Harris Steel is increasingly expanding across North America, as expanding across North America, as well as overseas.well as overseas.
Total assets are up 45.7% from last Total assets are up 45.7% from last year.year.
RatiosRatios
2005 2004 2003 2002
Net Working Capital271,593,0
00237,494,1
20155,353,5
99215,964,8
16Current Ratio 2.43 2.84 3.27 3.16Average Age of Inventory 90.7153 109.0286 78.1198 89.4419Average Collection Period 85.3131 76.4949 81.5945 76.6132Fix Assets Turnover 11.58 12.72 10.37 11.09Total Asset Turnover 1.84 1.73 1.89 1.91Debt Ratio 40% 35% 25% 26%
RatiosRatios
Common Equity Ratio
0.02950.0382 0.0513 0.0511
Times Interest Earned Ratio
52.8646 11303.9735 86.8123 37.2058
Gross Margin 17% 21% 10% 14%
Operating Margin 11% 15% 2% 7%
Profit Margin 6% 10% 1% 5%
Return on Total Assets
12%17% 2% 9%
Return on Equity 20% 26% 2% 12%
Earnings Per Share 2.38 2.67 0.67 3.66
2005 2004 2003 2002
StrengthsStrengths
Liquidity – current ratio consistently Liquidity – current ratio consistently above 2.0above 2.0
Assets are mainly current and have Assets are mainly current and have the ability to be dissolved to cover the ability to be dissolved to cover any debtsany debts
Have the ability to generate free Have the ability to generate free cash flow and profits even in a tough cash flow and profits even in a tough and economic environmentand economic environment
StrengthsStrengths
Have a strong balance sheet that Have a strong balance sheet that provides the liquidity to invest in provides the liquidity to invest in substantial inventory levels allowing substantial inventory levels allowing them to capitalize on meeting the most them to capitalize on meeting the most demanding, time-sensitive customer demanding, time-sensitive customer priorities. priorities.
They balance low inventory costs with They balance low inventory costs with higher sales prices and produce higher sales prices and produce exceptionally well.exceptionally well.
No substantial long term debtNo substantial long term debt
WeaknessWeakness There is no substantial long term debt There is no substantial long term debt
which means that Harris Steel may not which means that Harris Steel may not be investing funds efficiently to expand be investing funds efficiently to expand the company.the company.
Profitability ratios show below industry Profitability ratios show below industry average levelsaverage levels
Profit margin is less than half of industry Profit margin is less than half of industry average.average.
P/E Ratio is 19.39, potential investors P/E Ratio is 19.39, potential investors may go to a competitor to invest their may go to a competitor to invest their fundsfunds
Industry ComparisonIndustry Comparison
NameSymbo
l
Profit Margi
n
Gross Margi
n
Operating
Margin ROE P/EIndustry Average 13.90% 23.51% 12.39% 29.60% 11.00
Harris Steel Group
HSG.TO 6.33% 17.60% 11.00% 19.59% 19.39
Commercial Metals Co. CMC 3.27% 13.89% 7.29% 29.20% 10.75
Steel Dynamics Inc. STDL 12.51% 25.63% 20.35% 37.59% 11.46
Firedman Industries FRD 2.90% 7.98% 5.25% 19.81% 7.95
Graphical ComparisonGraphical Comparison
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
ProfitMargin
GrossMargin
OperatingMargin
ROE
Industry Average
Harris Steel GroupHSG.TO
Commercial Metals Co.CMC
Steel Dynamics Inc.STDL
Firedman IndustriesFRD
OpportunitiesOpportunities
To purchase more reinforcing steel To purchase more reinforcing steel developments, for example Lafarge Canada developments, for example Lafarge Canada Inc. in British Columbia, Alberta and Inc. in British Columbia, Alberta and Saskatchewan.Saskatchewan.
To strategically grow their business in To strategically grow their business in regional markets in Canada and the United regional markets in Canada and the United States.States.
Improve production methods through long Improve production methods through long term financingterm financing
Improve production outputs through long Improve production outputs through long term financingterm financing
ThreatsThreats Massive expansion in the world steel market in Massive expansion in the world steel market in
2004, causing increases in the supply of raw 2004, causing increases in the supply of raw materials, especially scrap, used to make steel. materials, especially scrap, used to make steel.
This resulted in a spectacular increase in the This resulted in a spectacular increase in the price of steel. price of steel.
Therefore many of the orders for steel supplies Therefore many of the orders for steel supplies were cancelled, or reduced or surcharges were cancelled, or reduced or surcharges added.added.
If the market for steel continues to expand If the market for steel continues to expand this is a real threat to this company because this is a real threat to this company because they can lose a lot of their business.they can lose a lot of their business.
Many new companies enter the market as the Many new companies enter the market as the prices have been driven up and forcing smaller prices have been driven up and forcing smaller companiescompanies
D.O.L.D.O.L.
Due to the fact that we cannot Due to the fact that we cannot determine the number of units that determine the number of units that were sold, we cannot establish the were sold, we cannot establish the DOL. DOL.
Several reasons why this might Several reasons why this might happenhappen
Most obvious is that they have many Most obvious is that they have many different products at different pricesdifferent products at different prices
D.F.L.D.F.L. 2002… DFL = 39,224,416 / (39,224,416 – 1,054,225 - [1,617,103 / 1 – 2002… DFL = 39,224,416 / (39,224,416 – 1,054,225 - [1,617,103 / 1 –
0.371])0.371]) 2002 DFL = 1.102002 DFL = 1.10 2003… DFL = 11,893,193 / (11,893,193 – 136,999 – [1,604,119 / 1 – 2003… DFL = 11,893,193 / (11,893,193 – 136,999 – [1,604,119 / 1 –
0.621]) 0.621])
2003DFL = 1.582003DFL = 1.58 2004… DFL = 110,123,310 / (110,123,310 – 9,742 – [5,245,741 / 1- 2004… DFL = 110,123,310 / (110,123,310 – 9,742 – [5,245,741 / 1-
0.336])0.336]) 2004DFL = 1.072004DFL = 1.07 2005… DFL = 112,443,000 – (112,443,000 – 2,127,000 – [9,962,000 / 1 – 2005… DFL = 112,443,000 – (112,443,000 – 2,127,000 – [9,962,000 / 1 –
0.358])0.358]) 2005DFL = 1.192005DFL = 1.19 Financial Leverage is shown here due to the Financial Leverage is shown here due to the
fact that the DFL is greater than 1, every year.fact that the DFL is greater than 1, every year.
D.T.LD.T.L
DTL also cannot be calculated as we DTL also cannot be calculated as we are unable to determine a value for are unable to determine a value for the DOLthe DOL
Stock AnalysisStock Analysis
Last trading dayLast trading day 12 Mar 200712 Mar 2007 Last priceLast price CAD 46.25CAD 46.25 SymbolSymbol HSG.TOHSG.TO Hist. volatility 180Hist. volatility 180 35.65 %35.65 % Avg. Volume last monthAvg. Volume last month 32’92032’920 Latest P/E RatioLatest P/E Ratio 16.0616.06 Avg. Analyst RatingAvg. Analyst Rating HoldHold
Stock chart Stock chart 30 March 2001 to 30 30 March 2001 to 30 March 2006March 2006
Stock chart Stock chart 2 Oct 2006 to 31 Oct 2 Oct 2006 to 31 Oct 20062006
Price trend for Harris Steel Grp
25
26
27
28
29
30
31
Oct 22006
Oct 9 Oct 16 Oct 23 Oct 30
Harris Steel Grp (TOR) in CAD S&P 500 (OUI) rebased© UBS AG
0.0M
0.1M
0.2M Volume
Stock chart Stock chart 7 Nov 2006 to 2 Jan 7 Nov 2006 to 2 Jan
20072007 Price trend for Harris Steel Grp
32.5
35.0
37.5
40.0
42.5
45.0
47.5
Nov 72006
Nov 13 Nov 20 Nov 27 Dec 42006
Dec 11 Dec 18 Dec 25
Harris Steel Grp (TOR) in CAD S&P 500 (OUI) rebased© UBS AG
0.0M
0.1M
0.2M Volume
Price trend for Harris Steel Grp
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006
Harris Steel Grp (TOR) in CAD
S&P 500 (OUI) rebased
Moving average 38 days (s)
© UBS AG
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Stock price vs. steel priceStock price vs. steel pricePrice trend for Harris Steel Grp
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006
Harris Steel Grp (TOR) in CAD
S&P 500 (OUI) rebased
Moving average 38 days (s)
© UBS AG
Price trend for Harris Steel Grp
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006
Harris Steel Grp (TOR) in CAD
S&P 500 (OUI) rebased
Moving average 38 days (s)
© UBS AG
Performance AnalysisPerformance Analysis
PerformancePerformance $ $ 500,000500,000
InvestmentInvestment
29 Dec 2000 - 2 Mar 200729 Dec 2000 - 2 Mar 2007 1098 %1098 % $ 5,990,909$ 5,990,909
2 Jan 2004 – 2 Mar 20072 Jan 2004 – 2 Mar 2007 779 %779 % $ 4,393,333$ 4,393,333
23 Jan 2006 – 2 Mar 200723 Jan 2006 – 2 Mar 200765 %65 % $ 826,999$ 826,999
5 Year Performance Analysis5 Year Performance Analysis
Nominal stock returnNominal stock return 849 %849 % InflationInflation 12.13 %12.13 % Real stock returnReal stock return 836.87 %836.87 % $ 500,000 Investment$ 500,000 Investment $ 4,684,350$ 4,684,350
Nominal return GICNominal return GIC 23.65 %23.65 % InflationInflation 12.13 %12.13 % Real return GICReal return GIC 11.52 %11.52 % $ 500,000 Investment$ 500,000 Investment $ 557,600$ 557,600
Outperformance stockOutperformance stock 825.35 %825.35 % Difference in capital gainDifference in capital gain$ 4,626,750$ 4,626,750
RecommendationsRecommendations
Maintain a solid rate of efficiency Maintain a solid rate of efficiency within.within.
Obtain more investors of Harris Steel in Obtain more investors of Harris Steel in order to continue to expand worldwide.order to continue to expand worldwide.
Use of long-term financing to increase Use of long-term financing to increase leverage and ROE.leverage and ROE.
Merger with Nucor can help increasing Merger with Nucor can help increasing purchasing power, reduce COGSpurchasing power, reduce COGS
Final ThoughtsFinal Thoughts
By continuing to grow and expand, By continuing to grow and expand, Harris Steel will continue to satisfy Harris Steel will continue to satisfy shareholders with increasingly shareholders with increasingly growing share prices, and growing share prices, and outstanding growth in dividend outstanding growth in dividend payments each quarterly period.payments each quarterly period.