Finding Value in the Economically Sensitive Metals Sector (AA, ACI, CENX, NUE, STLD, WOR)

24/7 Wall St. has been conducting a search for value stocks for investors.  Our review today is around the base metals and industrial metals segment, a very cyclical segment compared to other segments we have reviewed.  Some companies offer great dividends, some offer high return on equity (ROE).  Some offer dirt-cheap projected earnings multiples, and some trade at very low multiples of book value.  The list of companies today includes shares of the following: Alcoa, Inc. (NYSE: AA); Arch Coal Inc. (NYSE: ACI); Century Aluminum Co. (NASDAQ: CENX); Nucor Corporation (NYSE: NUE); Steel Dynamics Inc. (NASDAQ: STLD); and Worthington Industries, Inc. (NYSE:  WOR).

Forward PE multiples range from 6.7 to almost 12 and the return on equity (ROE) is as low as 3.6% to as high as 18.5%.  Five of these companies boast ROE’s greater than 8.5%.  Analysts estimate next year’s earnings will range from a 15% year-over-year increase to an increase of about 60%.  Most of these companies are expected to post an increase in next year’s earnings above 30%. Consensus target prices from analysts indicate that each of these have above-market upside from Thomson Reuters, with most looking to be above 20%.  Most of these companies also show a price to book ratio of 2.4 to 1 or lower.  Except where otherwise noted our source for all financial and performance data is Finviz.

Alcoa, Inc. (NYSE: AA) is the largest of these companies with a market cap of $17.3 billion.  This is also one of our freshly featured “Top Stocks That Will Set Market Trends For This Summer” as it leads off in earnings season this coming week.  Its price to book ratio is 1.17 to 1, best of the lot.  With a consensus target price of $19.67 the shares have an implied greater than 20%.  Alcoa shares recently traded at $16.49 and its 52-week trading range is $9.86 to $18.44.  We do not expect this to occur, but we do have to admit that this was considered a loose takeover candidate in the recent past.  It also hit $40.00 before the recession.  Alcoa offers a very unexciting dividend of about 0.7%.

Arch Coal Inc. (NYSE: ACI) may seem an odd fit in our base metals screen, but that is because of its metallurgical coal operations that feed the steel industry.  Technically it does actually lead the rest of our screened companies in three of our financial measures: forward P/E, analysts’ implied price upside, and analysts’ estimated earnings growth.  The reason or explanation may simply be because many estimates have not properly adjusted since its International Coal acquisition.  Our review was on a standalone basis and we always want to point out that estimates and projections can often lag by a quarter when M&A is in the mix.  The company’s forward price to earnings multiple is less than 7 as analysts see next year’s earnings growth of about 60%.  Again, consider the merger.  With a consensus target price of $39.28, the shares have an implied upside of more than 40%.  Arch Coal shares recently traded at $27.34 and its 52-week price range is $19.03 to $36.86.  After the acquisition was completed, S&P affirned a “BB-” corporate credit rating.

Century Aluminum Co. (NASDAQ: CENX) is second best among these companies with a low price to book ratio of 1.26 to 1.  It also trades at less than 9-times 2012 projected earnings from Thomson Reuters consensus data.  Unfortunately, Century is stingy when it comes to dividends.  Its $1.48 billion market cap makes Century the smallest of these companies.  Its consensus target price of $19.75 implies an upside greater than 24%.  The company’s shares recently traded at $15.87 and the 52-week trading range is $8.57 to $20.76.

Nucor Corporation (NYSE: NUE) has a market cap of $13 billion making it the second largest company in this lot.  The manufacturing and sales company of steel and steel products actually has an unimpressive 3.6% return on equity (ROE) per the Finviz screen, which, if entirely accurate, screened out as the lowest among these companies.  It also pays a 3.6% dividend yield.  With a consensus target price of $50.38, the shares still have an implied upside of 23%.  Nucor shares recently traded at $40.82.  The 52-week price range is $34.48 to $48.40.  While it trades at 15.6-times 2011 earnings estimates, the multiple drops down to under 11-times the 2012 earnings estimates.

Steel Dynamics Inc. (NASDAQ: STLD) is in an interesting place since it recently gave earnings and offered guidance which was technically a bit light.  Still, shares have recovered about 10% since its report and it seems that the valuations may be a part of the “why” that recovery has been seen.  The steel products operator has a price to book ratio of 1.62 to 1, third best among these companies.  With a consensus target price of $21.83, the shares have an implied upside of 34%.  That is actually the second highest among these companies. Shares of Steel Dynamics recently traded at $16.25.  The 52-week price range is $12.92 to $20.45. Steel Dynamics also pays a 2.5% dividend yield.

Worthington Industries, Inc. (NYSE: WOR) is one of the smaller companies with a market cap of just under $1.7 billion.  It also leads these companies with a 16.4% return on equity (ROE).  It also trades at about 13-times next year’s projected earnings.  With a consensus target price of $26 the shares of this metals processor have an implied upside of 12% to the consensus price target.  Worthington shares recently traded at $23.22.  The 52-week price range is $12.00 to $23.75.  Worthington’s dividend yield measures today at about 2.1%.

Having the term “value” does not imply immediate gains nor does it imply that there are no risks.  The market has also just recently enjoyed a great bounce.  When it comes to M&A and it when it comes to long-term investing it is the value segment that often outperforms the market and which can hold up better if and when the markets head south again. Earnings season is about to be underway and many of these figures may change in the coming weeks.

JON C. OGG