Commodities & Metals

Merrill Lynch Raises Price Targets on 6 Top Steel Stocks to Buy

Lee Jackson

Published: January 9, 2018 8:20 am

Last Updated: January 12, 2020 4:41 am

Talk about a sector that has a lot going for it, the steel industry has probably among the best set of tailwinds for 2018, and investors should be thrilled. Combine a continued weak dollar, with production cuts in China, and then add in a president who keeps the pressure up on countries who don’t act fair in trade, and you have all of the ingredients for a stellar 2018.

A new research report from Merrill Lynch’s outstanding analyst Timna Tanners suggests that U.S. benchmark steel prices are set to continue trading through the $700 level in 2018, and the firm raised price targets on its top stocks to Buy. Six companies are boosted higher, and all makes sense for longer-term growth portfolios.

AK Steel

This stock has rallied recently but still offers investors a solid entry point at current levels. AK Steel Holding Corp. (NYSE: AKS) is the sixth largest U.S. steelmaker and has the capacity to produce nearly 7 million tons of a total 110 million tons of U.S. steel capacity. It produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. The company produces flat-rolled value-added carbon steels, including coated, cold-rolled and hot-rolled carbon steel products, as well as specialty stainless and electrical steels in sheet and strip forms.

AK Steel also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial and construction markets. It buys and sells steel and steel products and other materials, and it produces metallurgical coal from reserves in Pennsylvania.

The Merrill Lynch price target on the shares was raised to $8 from $6. The Wall Street consensus price objective is $6.23, but shares closed Monday above that level at $6.64.

Commercial Metals

Shares of this lesser known company provide solid value for investors at current trading levels. Commercial Metals Co. (NYSE: CMC) manufactures, recycles and markets steel and metal products, and related materials and services in the United States and internationally.

As one of the leading suppliers to the nonresidential construction sector, Commercial Metals has revived as that area of the market has picked up. The U.S. Architecture Billings Index (ABI), an economic indicator that provides 9-to-12-month growth forecast of nonresidential construction spending activity, which has shown very consistent growth.

Shareholders are paid a 1.91% dividend. Merrill Lynch lifted its price target from $27 to $28, while the consensus target is $22.50. The shares closed Monday at $25.28.

Nucor

This top steel company could do very well if the economy continues to pick up and the administration’s infrastructure push comes back to the forefront. Nucor Corp. (NYSE: NUE) is one of North America’s largest steel producers, with almost 27 million tons of finished steel capacity at 23 mini-mills throughout the United States. The company’s downstream steel products business includes rebar fabrication, steel joists/deck, cold finished bars, fasteners, building systems and wire mesh. Nucor also has 5 million tons of scrap processing capacity.

Nucor has always kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially if a huge infrastructure build-out becomes a reality. Some think that continued demand from the rebuilding of large parts of Houston after Hurricane Harvey and storm damage in Florida could also be a positive.

Nucor investors receive a 2.23% dividend. The $67 Merrill Lynch price target was raised to $75. The posted consensus target is $66.54, and the stock closed Monday at $68.24 a share.

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Reliance Steel & Aluminum

Wall Street analysts are positive on this top service center play. Reliance Steel & Aluminum Co. (NYSE: RS) provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products. Its primary processing services comprise cutting, leveling, sawing, machining and electro polishing.

The company also fabricates and distributes structural steel components and parts; provides metal components and inventory management services; and distributes alloy, carbon and stainless steel bar and plate products, as well as steel and nonferrous and aerospace metals, including aluminum, steel, titanium, nickel alloys and aluminum bronze, offering full or cut to size materials.

Reliance is the largest metals service center company in North America, operating in more than 200 locations. About half of its business is warehousing and the other half involves some sort of value-add processing or fabricating. Non-ferrous volume comprises about 30% of its annual shipments. The company tends to sell small spot-priced tons to customers, the majority requiring delivery within 24 hours.

Shareholders receive a solid 2.01% dividend. The Merrill Lynch price target rose from $90 to $97, while the consensus target is $86.40. The stock closed Monday at $89.68.

Steel Dynamics

This is another stock that the Merrill Lynch team remains very positive on. 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. Steel Dynamics can process about 7 million tons of ferrous scrap and has a downstream operation that processes finished steel.

Shareholders are paid a 1.35% dividend. The Merrill Lynch price target went to $51 from $45. The consensus target is$43.67, and shares closed Monday at $45.97.

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U.S. Steel

This venerable steel producer remains a favorite across Wall Street. United States Steel Corp. (NYSE: X) produces and sells flat-rolled and tubular steel products in North America and Europe. It operates through three segments. Its Flat-Rolled Products segment offers slabs, rounds, strip mill plates, sheets and tin mill products. This segment serves customers in the automotive, consumer and the combined industrial, service center and mining commercial markets.

The Tubular Products segment offers seamless and electric resistance welded steel casing and tubing, as well as standard and line pipe and mechanical tubing products primarily to customers in the oil, gas and petrochemical markets. The company also provides railroad services and owns, develops and manages various real estate assets.

And its U.S. Steel Europe segment provides slabs, sheets, strip mill plates, tin mill products and spiral welded pipes, as well as heating radiators and refractory ceramic materials. This segment serves customers in the construction, service center, conversion, container, transportation, appliance and electrical, oil, gas and petrochemical markets.

Shareholders receive a 0.75% dividend. Merrill Lynch lifted its price target to $46 from $32. The consensus target is $35.38. The shares closed Monday at $39.42 apiece.

The weak dollar has been very helpful to the industry for much of 2017 and is expected to continue providing a lift this year, and while the dollar won’t stay weak forever, you can bet that the steel industry would like to see it stay weak for the time being. With pricing firm, and export potential and demand at home still strong, all these stocks make sense for growth investors.