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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (7901)	2/12/2004 4:08:21 PM
From: russwinter	Respond to of 110194

Ok, eye of the beholder. Elsewhere MVK appears to be successful passing higher steel costs on: Bottom of the Barrel: Steel Steals Maverick's Thunder By Christopher Edmonds Special to RealMoney.com 2/12/2004 3:29 PM EST URL: thestreet.com The management of Maverick Tube (MVK:NYSE) must have nerves of steel. This Missouri-based producer of oil country tubular goods (OCTG), including the tubing used to bring oil and natural gas from the ground, has performed well as exploration-and-production companies have increased activity. I've suggested before that Maverick was a solid play on increased oil and gas drilling. Pricing Pressures An additional facet to the Maverick story in 2003 was the potential for increasing margins. Steel prices declined just as demand for Maverick's OCTG products was increasing, so Maverick saw not only its revenue increasing as sales firmed, but also margins in 2003. That should've created significant leverage for Maverick as well as other OCTG producers such as Lone Star Technologies (LSS:NYSE) and NS Group (NSS:NYSE) . It did for Maverick, which experienced profit improvements toward the end of 2003. However, what Maverick and investors didn't expect -- and what creates a new challenge -- is that lower steel prices would be so short-lived. With an improving economy and increased demand from China, steel prices began to firm late in 2003. Stable to modestly higher prices would pose little threat to Maverick as increased demand for tubulars continued to push revenue higher and held margins steady as long as the companies could keep fixed costs under control. However, such stability wasn't in the cards. Raw-material steel prices have soared in the first two months of 2004. Maverick's raw material costs will have increased $100 per ton when Nucor (NUE:NYSE) and other steel producers push through an anticipated $40-per-ton increase on March 1. Because Maverick depends on flat-rolled steel, it can do nothing to avoid the cost hike. That's the bad news. The good news is that, at least so far, Maverick has been able to pass the increased costs on to its customers, the E&P companies. For the time being, increased steel prices haven't had much of an impact on profits, although a number of E&P companies have only begrudgingly accepted the price hikes, suggesting that additional raw material inflation could impact margins. For Maverick, that's the million-dollar question: How many more price increases can the company push to the end-user before demand feels a pinch? With the current energy commodity prices and robust drilling demand, Maverick may well have pricing power in the coming months, allowing it to continue to pass higher steel costs on to its customers. However, the company is now faced with a battle just to maintain margins, in sharp contrast to last year's environment that would've allowed Maverick to enjoy wider profit margins and increasing demand at the same time. That creates a more challenging operating environment for Maverick and other tubular manufacturers. An Ironic Boost That said, early 2004 price hikes may actually benefit Maverick in the first quarter. When steel companies announced a price hike effective Jan. 1, Maverick pushed its prices higher at the same time. However, Maverick had lower-priced inventory in its production yards, meaning -- at least until that inventory is gone -- the company can enjoy wider margins. That phenomenon is likely to continue through the balance of the first quarter and into the beginning of the second, so Maverick could see higher-than-expected profits in the first three months of this year. First-quarter earnings are now estimated to come in at 45 cents a share, but the Jan. 1 price increase could boost Maverick's per-share earnings by as much as 15 cents to 25 cents. That effect is only temporary, though, and when investors look beyond the first quarter, they'll probably see a much more challenging cost structure ahead for Maverick. It remains the premier company in its field, and it's highly leveraged to the potential for continued oil and gas drilling. However, its ability to expand margins in the coming months is limited, and growth is now simply a function of its ability to pass through costs combined with increased demand for its products. If steel prices moderate, Maverick will benefit. If they don't, the company will just hope the price increases hold and drilling continues. If raw material prices were to jump another $100 per ton in the second quarter, investors may be the ones who will need nerves of steel.