Steel’s Slow-Motion Recovery (AKS, X, NUE, STLD, MT, AA)

Global demand for steel remains weak even as prices for iron ore rise slightly indicating that steelmakers could be in for another tough quarter. As if on cue, AK Steel Holding Corp. (NYSE: AKS) this morning said it expects EPS for the second quarter to be $0.04-$0.06, well below the previous consensus estimate of $0.11. The company’s forecast is weighing on United States Steel Corp. (NYSE: X), Nucor Corp. (NYSE: NUE), and ArcelorMittal (NYSE: MT) as well this morning. Steel Dynamics Inc. (NASDAQ: STLD) is bucking the trend even though it too forecast lower second quarter earnings this morning.

Even Alcoa Inc. (NYSE: AA) is taking a hit despite higher prices for aluminum in Asia. The price of aluminum had dropped substantially and while the rise is expected to help for the second half of 2012, the second quarter is pretty much already in the books at depressed prices.

AKS Steel Holding Corp. (NYSE: AKS) traded at $5.19 and has a market value of $572 million. The consensus target price from Thomson Reuters is $8.54 and the 52-week range is $4.59 to $16.75. AK Steel has a dividend yield of 3.8%. The implied upside to the consensus target is 65%, and the target price is well below the 52-week high.

United States Steel Corp. (NYSE: X) traded at $18.61 and has a market value of $2.6 billion. The consensus target price from Thomson Reuters is $33.29 and the 52-week range is $17.67 to $47.33. US Steel has a dividend yield of 1.1%. The implied upside to the consensus target is 79%, but we would note again that the target is below the 52-week high.

Nucor Corp. (NYSE: NUE) traded at $37.31 and has a market value of $11.8 billion. The consensus target price from Thomson Reuters is $46.10 and the 52-week range is $29.82 to $45.75. Nucor has a dividend yield of 3.9%. The implied upside to the consensus target is 24%, and the target price is above the 52-week high.

ArcelorMittal (NYSE: MT) traded at $14.66 and has a market value of $22.6 billion. The consensus target price from Thomson Reuters is $26.25 and the 52-week range is $13.28 to $35.31. ArcelorMittal has a dividend yield of 4.3%. The implied upside to the consensus target is 79%, but we would note again that the target is below the 52-week high.

Steel Dynamics Inc. (NASDAQ: STLD) traded at $11.14 and has a market value of $2.44 billion. The consensus target price from Thomson Reuters is $16.43 and the 52-week range is $8.78 to $16.66. Steel Dynamics has a dividend yield of 3.6%. The implied upside to the consensus target is 47%, and the target price is essentially equal to the 52-week high.

Alcoa Inc. (NYSE: AA) traded at $8.75 and has a market value of $9.3 billion. The consensus target price from Thomson Reuters is $11.73 and the 52-week range is $8.21 to $16.60. Alcoa has a dividend yield of 1.4%. The implied upside to the consensus target is 34%, but we would note again that the target is below the 52-week high.

Two weak earnings forecast in one day ought to warn investors off the steel sector, at least for a while. We looked at US Steel, Steel Dynamics, and ArcelorMittal about a month ago, and target prices for all three have fallen since then. Adding in today’s forecasts makes to outlook for the second quarter even weaker.

For the rest of the year, too many things have to go right for the steelmakers in order to improve their earnings potential. Iron ore prices can’t rise too fast, metallurgical coal prices need to remain subdued, demand from China and Japan must pick up, and the global economy as whole needs to improve. Chances seem remote of all those happening in a timely fashion and with enough force to move steel prices higher.

If one is determined to invest in a steel company, then a high dividend would be the decisive factor. ArcelorMittal, Nucor, and Steel Dynamics are the best houses in a bad neighborhood.

Today’s warning from AK Steel has sent shares down about -4.5% to $5.08. Steel Dynamics’ shares have fallen just -0.14%. The declines have been softened somewhat by the World Trade Organization’s weekend ruling that China violated some rules of international trade by imposing duties on imports of electrical steel from AK Steel, among others.

Paul Ausick