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Is the BlueScope (ASX:BSL) share price a buy after upgrading guidance?

The BlueScope Steel Limited (ASX: BSL) share price surged yesterday after the steel producer released upgraded guidance figures for the first half of FY21.

The BlueScope share price has well and truly recovered since the company’s March lows and closed at $17.72 on Thursday, 18% higher than its pre-COVID levels. Are BlueScope shares a buy today?

BSL share price chart

Source: Rask Media 1-year BSL share price chart

What does BlueScope Steel do?

BlueScope is a market leader in premium branded coated and painted steel products that was born out of a demerger from BHP Group Ltd (ASX: BHP).

I commend its marketing team, as I’m sure many people are familiar with brands like ColorBond, despite having little to no interest in steel roofing materials.

What was the update?

Yesterday, the company advised that it now expects underlying EBIT of $475 million for 1H21. It did also indicate that this amount included the additional contribution from its recent property sale by BlueScope Properties Group.

This EBIT figure is around 80% higher than what BlueScope achieved in 2H20, which was of course impacted by the COVID-19 situation.

Based on the company’s last announcement, it was only expecting to achieve underlying EBIT of around $340 million in the first half.

Segment performance

Much of the outperformance was driven by BlueScope’s domestic construction and distribution segment. Demand for coated and painted products was particularly strong, further driven by the contribution from export coke which remains elevated and is expected to be greater than 2H20.

In the US, automotive volumes appear to be normalising and as such, North Star (owned by BlueScope) continues to despatch at full capacity.

New Zealand and Pacific Islands’ performance is also reportedly performing extremely well as conditions return to normal post-COVID, with strong domestic demand for coated and painted products.

Management commentary

Commenting on the results, Managing Director and CEO Mark Vassella said, “All operating segments are performing well and momentum has continued to build as we approach the end of 1H FY2021. Residential alterations and additions activity, demand for detached new housing, and growth in demand for e-commerce warehouse and logistics facilities are all robust and US automotive industry demand is recovering strongly.”

“Demand strength, particularly in the Australian market, has continued to outpace our expectations. We now expect that Australian construction and manufacturing activity will remain strong, driving elevated domestic steel despatches for the balance of 1H FY2021.”

Some of my own thoughts on BlueScope shares

BlueScope is clearly doing well right now, but I’m not sure if it’s an industry that I’d particularly like to invest in. There seem to be many moving parts, not just within the business but also broader macroeconomic factors that determine the profitability of the business.

BlueScope could be considered by some as a price taker, which means it can only sell its products at the market rate of steel in this case. Global supply and demand for commodities ultimately dictate the market rate and these changes are often very cyclical, meaning earnings (and the BSL share price) can subsequently also move in a cyclical nature.

To complicate the matter even further, the steel spread is also affected by the often cyclical nature of raw material costs, which puts further pressure on its margins.

Right now, there are some structural tailwinds that are working in BlueScope’s favour. The US housing market is currently booming, which has recently seen the number of Americans buying new houses spike to a 14-year high.

This is still a tailwind for pre-existing houses, as renovations are often the first project after the sale of a property.

As the economy begins to fully reopen in Australia and New Zealand, I can see this providing an additional short-term tailwind.

Summary

I don’t invest in cyclical businesses too often, but usually, I’d be wanting to invest when shares look as beat-up as possible to take advantage of as much of the potential upside.

The BlueScope share price is nearly at all-time highs, and for this reason, I’m going to hold off buying shares at the moment.

The underlying factors at play here are fairly complicated and I would want to conduct some further research before I’d be buying at these levels.

To find out which shares I’m ready to pull the trigger on right now, check out this article: 3 ASX shares I’d buy today

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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