Since the beginning of this month, the Evraz (LSE: EVR) share price has collapsed by over 45%. Trading shares in the company have halted following news that the UK was imposing sanctions on Russian oligarchs. With solid financials, should I consider this as a long-term value business for my portfolio, or is there too much political risk?
Is the Evraz share price in bargain territory?
It’s clear why the share price has plummeted this year after recent events involving Russia and the West. Imposing significant sanctions, such as cutting off Russian banks from the SWIFT payment network, makes managing and developing mining sites incredibly challenging.
Despite this, here’s why I think it’s worth looking deeper into this stock. The core products for Evraz include steel, coal, vanadium and various raw materials. Vanadium is particularly interesting as it’s used to increase the energy density and voltage of car batteries. Demand for vanadium is growing with the electric vehicle trend, and the price of vanadium has doubled over the last few years. Finally, many of the other core products for Evraz have increased in demand recently.
In North America, Evraz is the number one producer of rail, large-diameter pipe and steel plates. With steel prices increasing recently due to supply constraints, I think this could still be an area of growth for Evraz. However, I believe Western sanctions would likely cause most of the development from its steel operations to happen outside of North America.
Around two-thirds of its revenues are currently being generated outside of Russia, and the company doubled its free cash flow last year. Meanwhile, the company increased its net income in 2020 by 158.78% and a massive 233.6% for 2021. With a net income of £2.21bn and a free cash flow of £1.79bn for 2021, I think the business model has been as strong as steel over recent years.
Regardless of what I think about the previously strong financials, I think it’s important to remember that in 2022, the Evraz share price has fallen like a knife through butter rather than steel.
The short-term future of the share price seems to be heavily linked with the geopolitical situation in Ukraine. With 39% of the company’s sales total coming from Russia last year, it isn’t easy for me to see how the Evraz share price can return to its previous highs any time soon. Additionally, the largest shareholder is Russian oligarch Roman Abramovich, who’s suffering from significant sanctions.
It’s difficult for anyone to predict political risk, and I think there’s too much uncertainty surrounding the company at the moment. Despite the Evraz share price substantially dropping this year, I’m avoiding it until the situation stabilises in Eastern Europe. A drop of over 80% in less than three months is a trend that I’d rather not fight against for the moment.
Sabir Husain has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.