[cnxvideo id=”655407″ placement=”ros”]One of the biggest metrics that economists look at when gauging the strength of any economy is the use of materials like steel, which is used in construction, infrastructure and a host of other areas. High use of the material is generally good for pricing, and while U.S. steel companies have enjoyed a decent run, and efforts have been made to halt the Chinese from dumping steel at lower prices, one top Wall Street firm thinks the top companies in the industry could be in for a rough latter half of 2016.
In a new Jefferies research report, top-notch analyst Seth Rosenfeld makes the case that while many of the companies in the firm’s coverage universe could guide higher quarter over quarter when they report third-quarter results next month, the overall trend in pricing is down. Plus, respondents to a recent survey were very negative, citing weaker demand.
The analyst notes that while pricing has already cracked, he does see a recovery for the big companies early next year as probable, and said this in the report:
We believe US steel prices will continue on a downward trajectory through year-end based on incremental weakness in raw material input costs as well as supply-side pressures from ramping capacity (ArcelorMittal’s BF restart & Big River ramp). Based on our revised analysis of the flat rolled market, we do see opportunity for producers to regain pricing power in the first half of 2017.
While lowering price targets on all the stocks in the firm’s universe except three, the analyst does remain very positive on two companies that he sees as defensive in nature, citing lower cost structures and less levered balance sheets.
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Nucor
This top steel company could do very well if the economy sees a solid pickup next year. Nucor Corp. (NYSE: NUE) and its affiliates are manufacturers of steel products, with operating facilities primarily in the United States and Canada. The company also is North America’s largest recycler.
Nucor products produced include: carbon and alloy steel, in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating and expanded metal; and wire and wire mesh.
While the residential construction market could slow down some in 2017 after years of a very torrid pace, op Wall Street analysts remain positive on nonresidential commercial construction. Nucor always has kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond.
Nucor investors are paid a solid 3.3% dividend. The Jefferies price target for the stock is $55, while the Wall Street consensus price target is $54.46. The stock was trading Thursday morning at $45.72.
Steel Dynamics
This company also remains a top steel pick at Jefferies. Steel Dynamics Inc. (NASDAQ: STLD) operates six steel mini mills in Indiana, Virginia, Mississippi and West Virginia. Production capacity has been nearly 10 million tons of a total 110 million U.S. capacity. The company makes flat rolled products, special/merchant bars and structural steel products. It can process about 7 million tons of ferrous scrap and has a downstream operation that processes finished steel.
The Metals Recycling Operations segment is involved in the purchase, process and resale of ferrous and nonferrous scrap metals into reusable forms and grades. Its ferrous products include heavy melting steel, busheling, bundled scrap, shredded scrap, steel turnings and cast iron products, as well as nonferrous products including aluminum, brass, copper and stainless steel. This segment also provides transportation logistics, management, marketing, brokerage and consulting services related to the scrap industry.
Steel Dynamics investors are paid 2.5% dividend. Jefferies has a $25 price target for the stock, and the consensus target is at $24.15. The stock closed Tuesday at $19.39 a share.
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And Others
The company retains a rating of Hold for AK Steel Holding Corp. (NYSE: AKS), with a $4.50 price target, and United States Steel Corp. (NYSE: X), with a price target of $18. Both of the targets have been lowered.
The report noted this about the two companies:
Integrated mills United States Steel and AK Steel are expected to face the brunt of the downside pressure given greater sensitivity to absolute steel prices and margin risk from surging coking coal prices.
The bottom line for investors is that, while the rest of 2016 looks rough, an uptick in pricing in 2017 could prove to be favorable. It may make sense to watch how the shares trade after reporting results for the third quarter in October and see if prices don’t fade some into the end of the year. That may provide an outstanding entry point for possible 2017 gains.
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