By Jeff Sanford
Toronto, Ontario -- February 20, 2018 -- In this week's Tuesday Ticker, a bid for outstanding Fenix shares takes the industry by surprise, steel prices spike, Boyd breaksrecords and much, much more!
The stock market meltdown earlier this month seems to have given way to a less volatile period. Fund managers will be watching what numbers turn up during the coming earnings season for clueless as to the direction of the economy. Each quarter publicly traded companies release their financial results and the coming weeks will see a flood of news about earnings. This week the stock news flow is minimal, but there were a couple key trends to worth noting.
One bit of news come Boyd Group Income Fund. According to an investor-focused website units in Boyd Group Income Fund gained almost five percent in one day of trading last week. Even as stock markets melted down the units of Boyd held up well, and actually hit record new price levels in January. The price of a single unit broke $105 twice earlier this month, and did so again this past week. It seems investors consider Boyd a solid investment at volatile moments. Boyd is structured as an income fund, which is a distinction legally distinct from a corporation. Structuring as an income fund a business can funnel revenues alluring to investors as income. The tax differences can be beneficial. Income funds have a tighter, more rigid capital structure than corporations, but total return can be greater. In some sectors, oil and gas, real estate, many organizations are structured this way. As is Boyd. Income funds are often considered an investment that passes along a very regular stream of revenue, like a dividend stock, or a fixed income stream from a bond. So no wonder the positive interest in Boyd share through the recent market chaos. Last Thursday units traded as high as $105.52. The volume of units traded had increased 7 percent from the average session volume. TD Securities recently increased their price target on units in the Boyd from $115.00 to $120.00. They also gave the stock a “buy” rating in a report issued January 30th.
Recyclers will be relieved to see some upward pressure on scrap steel prices. A big business story in the U.S. is the push by the steel magnate Wilbur Ross, a member of the Trump administration, is pushing through legislation that could trigger a global trade war over steel and aluminum. The administration is pushing the application of either tariffs or quotas on steel. Prices seem certain to rise. It is also being reported that China will reduce its steel production capacity two years earlier than planned. China is the world’s top steel producer. The ministry overseeing the industry has made it policy to reduce production levels by 150 million tonnes annually by 2020. News reports noted that China will carry out checks this year on closed furnaces as a way of preventing them from starting up again. If the reduction in global production comes to be this will provide more upward pressure on prices.
Could the potential for increases in the price of steel be behind an interesting bid announced this past week? It was interesting to note that Fenix Parts, a publicly-traded auto recycler, confirmed this week it has received an unsolicited, non-binding offer from Upstate Shredding, LLC to acquire all of the outstanding shares of common stock of the company. Fenix came into existence over the past couple years. More than a dozen existing auto recyclers came together, married and then listed shares as Fenix. The stock trades over-the-counter in the Nasdaq so-called “pink sheets” market. Now a buyer sees a deal in the shares.
According to a Fenix press release, “... the non-binding offer was received outside of the company’s previously announced strategic alternatives process, which is being managed by [investment bank] Stifel.” If steel prices rise, so will the value of these shares in the years ahead this could be a great investment. One pricing source estimate a small increase (0.5 percent) in global steel demand for 2017. A recent release from the World Steel ASsociation notes, “That projection proved to be far too conservative as the same report (above) in October 2017 anticipates an 8 percent increase in the price of steel in 2018. The forecast is a reaction in large part to China’s 9.3 percent increase in demand, but also the hat the pace of construction will accelerate through 2019. This increase followed suit in North America, where the price of steel is expected to climb 4.9 percent.”
The steel producer Nucor Corporation announced earnings of US$383.9 million for the fourth quarter of 2017. Nucor reported earnings of US$159.6 million for the fourth quarter of 2016. One of the reasons cited for the big increase in earnings is the fact that the average scrap and scrap substitute cost per ton used in the fourth quarter of 2017 was US$317, unchanged from the third quarter of 2017 [but] a 34 percent increase compared to US$236 in the fourth quarter of 2016. The average scrap and scrap substitute cost per ton used for the full year 2017 was US$307, a 35 percent increase from US$228 in for the full year 2016.”
If the current friends continues, if the price of steel (and scrap) onion ie to raise, buying up Fenix shares may be a bargain investment. According to the release from Fenix, “... [the] board of directors would continue to work with its financial and legal advisors to pursue a strategic or financial transaction that it believes is in the best interest of the company and Fenix Parts shareholders. The company said that it does not expect to provide further updates on the progress of this process until it deems appropriate and cautioned its stockholders not to assume that the aforementioned non-binding offer, or any other transaction with Upstate Shredding or any other party, will be completed.”
In other steel market news the American Metal Market (AMM) announced a ferrous shredded scrap futures contract. The contract recorded its first trade Jan. 12, 2018. By having a mechanism by which to lock in prices over a longer term those operating in scrap steel markets can minimize price volatility in their operation.