RYI: Ryerson

Current Stats
Date: 22 Jan 2007
Price: $29.76
P/E: 10.3
P/B: 1.2
Yield: 0.7%
Debt/Equity: 1.68
Data from MorningStar.com

Introduction
I pick Ryerson somewhat at random from those stocks on my watchlist, and already I'm having doubts based on the level of debt you see above - but I'll follow through this process so that I get a feel for how I want to analyze stocks.

Company Description
Ryerson is a metal distributor. They act as the middle-man between producers of metals such as aluminium (I'm British, okay...) and buyers who aren't big enough to negotiate directly with the producers.

Past 10-years
The last ten years haven't been great. In 4 of those 10 years (2000-2003) the company made a loss. The company's book value has actually declined from $789m to $639m over that period. Free cash flow has swung between wildly positive and wildly negative over the period, and the sum over all those years is getting on for $100m negative.

Pros
The reasons I was attracted to this stock in the first place were pretty simple - a P/E ratio of around 10 is fairly (but not spectacularly) cheap, and a price to book ratio of 1.2 is unusually cheap these days. I think these numbers were even better a month or so back when the stock first crossed my radar. The argument goes that if a stock is trading close to book value then the book value should place a pretty good floor under the stock price (as in the worst case you could always liquidate the company). The company has also done pretty well over the past 3 years - since 2003 the book value has increased from $382m to $639m, which is pretty spectacular.

Cons
But all of this is pretty quickly shot down by the debt. The whole point of value investing is that you try to minimize the risk. You choose a stock that is so cheap that the market is expecting bad news, and that is financially stable so that it can't actually go bust. In this case, the stock has an unstable earnings history, and is heavily in debt - interest on debt was approximately $50m for the first nine months of this year, and earnings were around $76m (after paying the interest obviously). There's not a whole lot of margin of safety there - particularly when you consider the patchy earnings history.

Conclusion
Personally, I won't touch this with a barge pole - due to the debt and the significant risk of future losses. I like to be able to sleep at nights, and with Ryerson I wouldn't feel secure that I wouldn't one day lose all my money.