Coal and Steel Play Follow the Leader (IIIN, RS, ACI, BTU, MEE, NUE)

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Two small-cap steel companies reported earnings before the market opened today. Insteel Industries (NASDAQ:IIIN) beat analysts’ estimates of $0.60 EPS on $101 million in revenue, posting EPS of $0.89 on revenues of $106 million. Reliance Steel (NYSE:RS) posted EPS of $2.07 on revenue of $2.57 billion, easily outpacing estimates of $1.95 EPS and revenue of $2.37 billion. Insteel is up more than 3% and Reliance is up more than 11% in early trading today.

Both companies’ shares are still way below 52-week highs, however, andboth reported weaker sales and lower prices for the last month of thequarter. Reliance even declined to issue guidance for the fourthquarter, citing the slowing economy and uncertainty about what thiscould mean for the steel industry. Insteel noted continuing sales andprice declines into October.

It is interesting to note how closely the share prices of these twocompanies track with the share prices of coal miners Arch Coal(NYSE:ACI), Peabody (NYSE:BTU), and Massey (NYSE:MEE). For the year,Insteel is off 52-week highs by 62% and Reliance is off just over 71%.Steel giant Nucor (NYSE:NUE) is down 67% from its highs as well.

Arch Coal and Peabody are off 73% from highs, while Massey is offnearly 80%. Graphing the daily changes for these companies over thepast year shows the virtually identical pattern of ups and downs(Massey peaked much higher than any of the others, but it has nowjoined them at the bottom).

It’s hard to say who’s following who here. If orders for steel aredown, then orders from steel makers to coal companies must be down aswell. Can it be that the little guys are dragging the big guys down? Ormaybe it’s just a coincidence–in the current economy, everybody’srelated to everybody else.

Paul Ausick
October 16, 2008