Worthington Industries To See 15% Drop In Value?

After a formidable rise of more than 140% since the March lows of this year and having surpassed its pre-Covid peak of this year, at the current price around $50 per share, Worthington Industries stock (NYSE: WOR) looks overvalued. Worthington Industries is a value-added steel processor, and manufactures a host of pressure cylinders products for industrial gas and cryogenic applications, transportation and alternative fuel storage, oil and gas equipment, and consumer brand retail products. WOR stock rallied from $21 to around $50 off its recent bottom compared to the S&P 500 which increased 52% from its recent lows. The stock was able to beat the broader market over recent months following the Fed stimulus package and expectations of revival in industrial and consumer demand following the gradual lifting of lockdowns. With the stock trading 46% above its December 2018 levels and the company’s revenues over the last two quarters having fallen 30% y-o-y, we believe the stock is likely to drop more than 15% from its current level. Our dashboard Buy Or Sell Worthington Industries Stock provides the key numbers behind our thinking.

Despite revenues dropping more than 18% and net income margins declining over 36% between FY2019 (12 months ending June 2019) and FY2020, the stock price increased during this time. The rise in stock price between Dec 2018 and Dec 2019 was driven by a sharp rise in the P/E multiple of the company. The multiple increased primarily driven by expectations of strong industrial and consumer demand leading to a turnaround in top and bottom line performance in the coming quarters. However, the multiple crashed in early 2020 following the outbreak of the coronavirus pandemic. The recent recovery in overall market sentiment led to an upswing in the P/E multiple which currently stands at over 35x, higher than its pre-crisis level seen in 2019, as well. We believe that the market is too exuberant and the company’s P/E multiple will likely drop below 30x to reach closer to its 2019 level in the near term, driving the stock price down.

Downside Trigger?

The coronavirus induced lockdown in various cities across the globe affected industrial and economic activity. This led to a drop in the demand for WOR’s products from its key industrial and consumer segments, while steel processing also suffered significantly. The company experienced mandatory and voluntary facility closures in certain jurisdictions of operation. Additionally, the pandemic also affected the company’s supply chain network. This was reflected in the recently released FY2020 results (ending June 2020), where WOR’s revenues declined 19% y-o-y. The fourth quarter of FY2020 (3 months ending June 30, 2020), which saw the most impact of the crisis, reported 35% y-o-y decline in revenues. Revenues in Q1 2021 dropped 18% y-o-y.

The gradual drop in the growth rate of positive cases in the last few months, along with lifting of lockdowns and stimulus measures boosted investor confidence, as was reflected in a sharp rise in WOR’s stock price. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. However, the recent spike in Covid-positive cases over recent weeks is a cause of concern for the company, as a major rise in cases could increase fears of another lockdown. In such a case, the expected recovery will be pushed ahead and the stock will see a sharp drop. Even in the absence of another lockdown, the company is unlikely to see a major turnaround in its revenue and margin trend immediately in the first half of FY2021. Even before the pandemic hit the world, Worthington industries was seeing a decline in its revenues and margins. Thus, we believe that the recent years’ as well as recent quarters’ performance does not justify such a sharp recovery of over 140% in stock price in recent months. We are likely to see a correction in the company’s P/E multiple, which will then lead to more than a 15% drop in Worthington Industries’ stock in the near-term.

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