Worthington Steel, Inc. (WS) stock intrinsic value fair value estimate & owner earnings analysis

Worthington Steel buys flat-rolled steel from mills and processes it (slitting, pickling, galvanizing, tailor-welded blanks and electrical steel laminations through its Tempel business) for automotive, construction, machinery, agriculture and heavy-truck customers. It was spun out of Worthington Industries on December 1, 2023. Its three largest customers, all automotive, took about 34.5% of fiscal 2026 sales. Margins depend on steel prices: when prices rise, inventory bought earlier is sold at a profit, and when prices fall the reverse happens. The business changed on June 3, 2026, just after the May 2026 fiscal year-end. Worthington took control of Germany's Kloeckner & Co, a metals distributor and processor with about 110 sites in the United States, Mexico, Germany, Austria and Switzerland and 2025 sales of about EUR 6.4 billion, roughly twice Worthington's own $3.4 billion. To pay for it, Worthington issued $700 million of 7.75% secured notes and took a $700 million term loan at SOFR plus 4%, both due June 2033, and replaced its credit line with a $550 million asset-based revolver due 2031. Worthington held about 61.9% of Kloeckner after buying more shares in June 2026. It offered the remaining holders EUR 11 a share in a delisting offer and signed a domination and profit-transfer agreement in September 2026, with a shareholder vote set for October 23, 2026. Under that agreement Worthington must cover any Kloeckner annual losses and pay the remaining minority holders either a buyout or a recurring payment. How we measured earnings: we used owner earnings, meaning operating cash flow with working-capital swings removed, minus stock compensation and the capital spending needed to keep the business running. Write-downs (including $114 million of impairments in fiscal 2026, $112 million of them in the electrical steel business, where demand for industrial motor laminations weakened under foreign competition and some automotive programs were delayed) are non-cash and are not charged against earnings. When revenue fell we treated all capital spending as upkeep, which is strict, because some of Tempel's spending in fiscal 2024-2026 was expansion. Before interest, Worthington's own business produced about $201 million in fiscal 2022 (the steel-price peak), $122 million in 2023, $121 million in 2024, $76 million in 2025 and $58 million in 2026. The 2026 figure is $79 million once the $21 million of Kloeckner deal fees is added back. We take about $100 million a year as the normal level: the middle of fiscal 2023-2026, leaving out the 2022 price spike. Kloeckner's own reports show that cash flow before interest, after capital spending of roughly EUR 90 million a year and lease payments of about EUR 70 million, was roughly break-even to modestly negative in 2024 and 2025. That is despite EBITDA before special items of EUR 136-171 million in those years. Kloeckner was only strongly cash-generative in the 2021-2022 steel-price boom. We value the combined business before interest and then subtract everything owed. All cash flows are discounted at 6%. What is owed: about $181 million of Worthington's own net debt at May 31, 2026. About $675 million was paid after year-end for Kloeckner shares. Kloeckner carried its own net financial debt of EUR 1.09 billion (about $1.26 billion) at March 31, 2026, which was higher than usual because of a seasonal and price-driven inventory build. Buying out or compensating the remaining ~38% of Kloeckner at EUR 11 a share costs about $481 million. Partners' share of the US joint ventures and Sitem comes to about $134 million. The new notes and term loan carry rates above 6% until 2033, which adds about $131 million. The total is about $2.86 billion, or roughly $56 per share. Interest on the new borrowing alone is roughly $107 million a year, and total interest is likely around $150-170 million. Bear case (-$37.61/share): Worthington's own business stays at its fiscal 2025-2026 level of about $75 million a year for 30 years. Automotive concentration, the weak industrial-motor demand behind the 2026 write-down, and heavy upkeep spending keep it there. Kloeckner loses about EUR 10 million a year in cash for a decade, in line with its 2024-2025 results, and Worthington must cover that under the profit-transfer agreement. The business is worth about $0.95 billion against $2.86 billion owed, so it would owe about $1.9 billion more than it is worth. Cash flow would not cover interest, and the 2031 revolver and 2033 notes and term loan would need refinancing on hard terms. Base case (-$14.10/share): Worthington's own business runs at about $80 million a year for two years, in line with fiscal 2026 after the deal fees. It then returns to the $100 million normal level it reached in fiscal 2023-2024. Kloeckner breaks even for two years, then produces about EUR 30 million a year, the level implied by its 2023 mid-cycle EBITDA of about EUR 190 million after capital spending, leases and taxes. The combined business is worth about $2.14 billion against $2.86 billion owed, so the company appears to owe roughly $0.7 billion more than it is worth. Pre-interest cash flow of about $135 million is below the likely interest bill. Bull case ($21.16/share): Worthington's own business earns its full-cycle median of about $121 million, including the 2022 peak. Kloeckner, after selling eight US distribution sites in 2025 and restructuring in Europe (EUR 18 million of restructuring costs that year), earns about EUR 100 million a year. That would take EBITDA of roughly EUR 260 million, between its 2023 and 2022 results. The business is worth about $3.93 billion against $2.86 billion owed, leaving about $1.08 billion for shareholders. What we left out: management's synergy target of about $150 million by fiscal 2028 is a goal and not yet a result, so no case counts it. No case credits any growth in steel demand, gains in market share, or Tempel expansion beyond what is already in the numbers. Worthington has grown mainly through large acquisitions (Tempel in 2021, Sitem in 2025, Kloeckner in 2026), not small, repeatable steps, so we credited no ongoing acquisition growth. The 2026 write-down of the electrical steel business, which was built from the Tempel and Sitem acquisitions, is a warning about how acquisitions have turned out. What would make this wrong: the company carries large inventories and receivables, Kloeckner's alone over EUR 1.1 billion. If steel prices fall, these turn into cash that can pay down debt. That cushion is real, but it shrinks again when prices recover. If Kloeckner's cash generation after leases and capital spending turns out well above its 2023-2025 record, or the synergies show up in reported cash flow, the value rises quickly because the debt is fixed. Our figures for Kloeckner's capital spending and lease payments come from its own reports and statements rather than from Worthington's audited accounts. The combined company's first quarterly report with Kloeckner included had not been filed when we did this analysis.