Worthington Steel: A Turnaround Play Amid Steel Sector Struggles?

Is Worthington Steel (WS) a Hidden Gem in a Challenged Industry?

The steel sector has been a battleground of volatility, with global overcapacity, trade tensions, and cyclical demand creating headwinds for producers. Yet, within this turbulent landscape, Worthington Steel, Inc. (WS) presents an intriguing paradox: declining financial metrics juxtaposed against strategic moves that could unlock value. As the company navigates a ROE slump and industry-wide pressures, investors must ask: Is now the time to buy WS stock, or are the risks too great?

The Numbers Tell a Story of Decline—But Not Yet Disaster

Worthington Steel's recent financials reveal a challenging narrative. In fiscal 2025, ROE has plummeted from 15.36% in 2024 to an estimated 12.1%, reflecting shrinking net earnings and operational headwinds. Third-quarter 2025 net sales dropped 15% year-over-year to $687.4 million, while operating income fell to $18.3 million—just 28% of 2024's figure.

Despite these red flags, dividends remain intact at $0.16 per quarter, with a consistent payout ratio of 29% of net earnings. This stability suggests management is prioritizing shareholder returns even as profits contract. However, the question looms: Can WS sustain this dividend if earnings continue to slide?

The Sitem Group Acquisition: A Pivot to High-Growth Markets?

A critical catalyst for WS's turnaround is its planned acquisition of a majority stake in Sitem Group, a European producer of electrical steel laminations. This move positions WS to capitalize on the global shift to electrification—a sector expected to grow as automotive and renewable energy demand surges.

Electrical steel, used in electric motors and transformers, is a high-margin niche with limited global capacity. Sitem's expertise could provide WS a foothold in this space, diversifying revenue beyond traditional steel markets. Management has cited this as a “strategic priority” to offset cyclical headwinds in construction and automotive sectors.

But risks remain: Integration challenges, regulatory hurdles, and the timing of the acquisition (set for early 2026) could delay benefits. Investors must assess whether the valuation of the deal aligns with Sitem's growth prospects.

Industry Context: Steel's Mixed Signals—And WS's Undervaluation

The broader steel industry faces a paradox: production volumes rose 1.8% in early 2025, but tariffs and overcapacity are stifling profitability. U.S. Steel's Q1 2025 net loss of $116 million underscores the sector's struggles. Yet, the industry's average P/E ratio of 9.84 (vs. 15.36 for tech-heavy sectors) suggests undervaluation.

WS's valuation, while not explicitly stated, likely mirrors this discount. If its P/E is in line with the sector, shares could be pricing in worst-case scenarios. The company's dividend yield of 2.57% further highlights its attractiveness in a low-yield environment—a rare feature in a sector where many peers have cut payouts.

Why Now? The Case for a WS Buy

1. Valuation Discount: With the sector's P/E at a 10-year low, WS's stock may reflect excessive pessimism about its turnaround.
2. Dividend Resilience: The $0.16/quarter payout signals confidence in liquidity and cash flow.
3. Strategic Shifts Paying Off: Sitem's acquisition targets a $20 billion+ electrical steel market, which could boost margins and diversify revenue.
4. Industry Turnaround Signals: Steel production utilization rates rose to 77.5% in May 2025, hinting at demand stabilization.

Historically, buying WS on its earnings announcement date and holding for 20 trading days has yielded an average return of 12.24% since 2020. While this strategy underperformed the broader market benchmark—which returned 20.33% over the same period—it still generated positive gains. However, investors should note the strategy's significant volatility (32.61%) and a maximum drawdown of 27.65%, indicating periods of substantial losses. The Sharpe ratio of 0.26 suggests that returns were not sufficiently compensated for the risk taken. This underscores the importance of considering WS's strategic moves, such as the Sitem acquisition, alongside these historical performance metrics when evaluating the investment's potential.

The Risks to Consider

• Earnings Volatility: WS's net earnings per share have fallen from $0.98 in 2024 to $0.27 in Q3 2025—a 72% drop.
• Debt and Capital Expenditures: Expanding into Europe may require significant capital, potentially straining balance sheets.
• Trade Policy Uncertainty: U.S. tariffs on steel imports could delay a full recovery in demand.

Final Call: A High-Reward, High-Risk Opportunity

Worthington Steel's stock is a classic “value trap” or “undervalued turnaround”—the distinction hinges on execution. The Sitem deal and focus on electrification are bold moves, but they require patience. For investors willing to bet on a sector rebound and WS's strategic vision, now could be the time to buy, with a target price of $15–$18 (assuming a 15x P/E on stabilized earnings).

However, those averse to risk should wait for clearer signs of earnings recovery. As one analyst noted: “WS is a bet on two things: the steel industry's resilience and its own ability to innovate. Both are in play.”

Act now—but with caution. The steel sector's recovery may not be linear, but WS's strategic moves make it a stock to watch closely in 2025.