Commodities & Metals

Why Steel Could Continue to Post Massive Gains All Through 2018

Lee Jackson

Published: April 18, 2018 10:05 am

Last Updated: January 12, 2020 12:50 am

The upswing in construction and the beginning of what could be the biggest infrastructure projects in the United States since the 1950s have provided the steel industry with a very positive performance profile over the last year. Steel pricing is substantially higher, and many of the mills are not expected to realize the increases until later this year in the second and third quarter. With results from the big companies starting to come out Wednesday after the close, investors have a chance to buy shares in front of the first-quarter numbers.

A new Deutsche Bank research report on the steel industry makes the case that not only could the first quarter be solid, but also subsequent quarters as well. The report said this:

It is worth noting that despite strong spot steel pricing (Hot rolled coil up ~20% year over year on average), sector EBITDA is only expected to increase ~4% year over year, due to a lagged effect of contracts, product mix (cold rolled steel up at a lower rate of ~8% year over year) and higher input costs (scrap, electrode, energy). However, net income is expected to increase 28% year over year to $811 million due to improved results expected from US Steel and the benefit of recent tax reform. Overall Net Debt is forecast to decline modestly (-2% quarter over quarter) to $10.6 billion. Focus expected to be mainly on management’s view on Section 232 and the impact of country exemptions/possible product exclusions, end-markets outlook as well as customer feedback post recent price hikes, and raw material cost pressures (namely scrap).

The Deutsche Bank analysts are very positive on four companies, and all four are rated Buy.

Nucor

This top steel company should do very well if the economy sees a continued solid pickup this year and the administration’s infrastructure push comes 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 is also be a positive that has carried into 2018.

Nucor investors are paid a very solid 2.37% dividend. The Deutsche Bank price target is for the shares is $76. That compares with the Wall Street consensus target of $75.36 and the recent share price of $65.15.

Reliance Steel & Aluminum

Deutsche Bank is 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 electropolishing.

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 2.26% dividend. Deutsche Bank has a $98 price target on the stock, while the posted consensus target is $99.92. The stock traded early Wednesday at $89.90 a share.

Steel Dynamics

Many on Wall Street remain very positive on this top steel company. 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.

Analysts feel Steel Dynamics remains one of the top picks in its sector, as a high-quality play on the gradually tightening domestic steel market and supported by bullish global trends led by Chinese supply-side reform. In the near term, the company should benefit from greatly improving margins as steel prices continue to move sharply higher.

Shareholders are paid a 1.62% dividend. The $53 Deutsche Bank price target is in line with the $53.50 consensus figure. Shares were changing hands at $47.15 on Wednesday.

U.S. Steel

This venerable steel producer remains a favorite at Deutsche Bank. 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 are paid a 0.55% dividend. Deutsche Bank has set its price target at $50. The consensus target was last seen at $48.71, and the shares were trading at $37.45.

The weak dollar has been very helpful to the industry, and it is expected to continue providing a lift this year. While the dollar won’t stay weak forever, you can bet that the administration 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 makes sense for growth investors.