Why Worthington Steel Melted Down on Wednesday

Worthington Steel (NYSE:WS) stock tumbled 10.5% through 11 a.m. ET Wednesday after missing on earnings last night.

Heading into earnings, analysts forecast Worthington to earn $0.68 per share (pro forma) on $2.7 billion in quarterly sales. In fact, Worthington earned only $0.57 per share -- and burned cash.

Worthington Steel Q1 earnings

Worthington tripled its Q1 sales year over year, growing them 212% to $2.7 billion after acquiring majority control of the German metals service center Kloeckner, but operating profit on these sales increased by only 16%. Net profit -- $0.57 after subtracting out "one-time" items -- was actually a $0.14 per share loss when calculated under generally accepted accounting principles (GAAP).

Acquiring Kloeckner affected Worthington's results significantly. Not counting sales from the new subsidiary, Worthington says its sales would have grown only 9% year over year on a 3% increase in steel shipped. Furthermore, not counting Kloeckner, operating profit would have declined rather than increased.

What's next for Worthington Steel stock

Management didn't provide guidance on what to expect for the rest of this fiscal year, and analyst coverage of the company on Wall Street is minimal. According to the best data we can get from S&P Global Market Intelligence, however, the consensus seems to be that Worthington might earn about $4.58 per share in fiscal 2027, which, on a $34 stock, suggests Worthington stock is being valued very cheaply at a price-to-earnings ratio of only 7.5x.

Worthington does carry a sizable debt load, however -- actually a bit more than its own market capitalization, net of cash on hand -- so the stock might not be as cheap as it appears at first glance. With net earnings declining, I'd be cautious about investing in this one.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.