Following in the footsteps of CSL Limited (ASX: CSL), global metals recycling company Sims Metal Management Ltd (ASX: SGM) has released a profit upgrade of its own this morning.
According to the release management expects first-half underlying earnings before interest and tax (EBIT) to be between $75 million and $79 million. This is a big increase on previous guidance of around $63 million.
As you might expect, the Sims Metal Management share price has surged higher on the news. At the time of writing its shares are up 5% to $13.13.
Driving the stronger-than-expected half-year result has been successful cost reductions, optimisation initiatives, and higher ferrous and non-ferrous prices.
But it might be a little too soon to get overly excited. Whilst the first-half looks set to be a huge success, management does have concerns over what's to come in the second half.
Recent declines in the price of coking coal, together with instability in Turkey and the typical winter weather challenges it faces in North America have all been earmarked as concerns.
An additional concern I have is the threat of low-cost and higher-quality billet from China and Russia. If rolling mills continue to opt for this product ahead of Sims, then it could find growth hard to come by in the future.
So with its shares changing hands at 35x trailing earnings as though it were a high-growth tech share, Sims might be one share that investors ought to keep away from at the moment in my opinion.
I think there are far better options for investors in the materials sector including the likes of South32 Ltd (ASX: S32) and Galaxy Resources Limited (ASX: GXY).
