Bluescope's recovery bump

After a spectacular share price run in the past year, steel maker Bluescope is on the verge of profitablity. But the stock may have outpaced reality.

Bluescope Steel (BSL), the flag bearer for Australia’s bruised and battered manufacturing sector, is showing clear signs of recuperation.

After years of massive losses, restructuring and repositioning, the company finally appears to be in a position to justify the faith shown by investors who last year propelled the group into second spot in terms of capital growth in the S&P/ASX 200 behind Magellan Financial Group (MFG).

While liberal splashes of red ink still blot the accounts, the rejuvenation of the company is gathering pace and this morning’s slightly better than expected result points to profitability in the year ahead.

Whether it is enough to maintain the momentum in Bluescope stock, however, is now being questioned.

Its international businesses in Asia, North America and New Zealand are generating steady profits while losses for the Australian operations have been greatly diminished.

The net loss of $84.1 million was a vast improvement on last year’s $1.04 billion, while underlying earnings finally turned the corner with a $29.7 million profit compared with last year’s $237.5 million loss.

While earnings beat guidance, revenue at $7.27 billion was a good deal lower than anticipated and 14% below last year’s level as loss making products were discontinued.

Bluescope shares soared 188% last financial year as optimists banked on a recovery in the company’s fortunes, forcing the army of short sellers to cover their positions (see David Gilmour's Four short-selling strategies in a volatile market).

The expected earnings recovery has been aided by the recent sharp fall in the Australian dollar. It is estimated that every 1c fall in the domestic currency adds $12 million to operating earnings. Given the currency drop didn’t begin in earnest until June, there was minimal impact evident in this morning’s accounts.

If expectations often outpace reality, Bluescope could well be the subject of Dickens novel. Investors hold great expectations for the steel group with hopes of a full-year $162 million profit, a prospect that now looks a stretch given the shortfall in revenue.

The company was coy on the outlook this morning, forecasting similar conditions in the first half of 2014 as the second half of 2013.

That could force a re-evaluation of the recent sharp run in Bluescope shares.