It probably has been the most discussed economic and political story of 2018, and it is one likely to stay front and center for some time. After years of huge trade imbalances with our trading partners, and years of unbalanced tariffs on many of our manufactured goods, massive tariffs have been put on foreign products destined for the United States, and that includes steel and aluminum.
How long and how deep the trade war between the United States and its trading partners will go is anybody’s guess, but one thing is for sure. Demand for steel in the growing economy is present, and in a new report, Deutsche Bank stays positive on five top companies. The report said this:
The market capitalization for our Steel & Service Center coverage has declined 7% since early June due to concerns over trade frictions, peak pricing, incremental domestic supply and Section 232 leakage through product exclusions/country exemptions. We recognize that we are at a higher point in the cycle, but our price targets are based on more ‘normalized’ 2019 earnings estimates using steel price forecasts significantly below current spot pricing.
Here are Deutsche Bank’s Buy-rated companies in order of preference.
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Commercial Metals
This lesser known stock provides 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, and that bodes well for the company.
Commercial Metals shareholders are paid a 2.16% dividend. The Deutsche Bank price target on the shares is $28, while the Wall Street consensus target is $25.80. The shares traded Tuesday morning at $22.50.
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. In addition, global weather catastrophes have also helped continue to drive the need for steel products.
Nucor investors receive a very solid 2.37% dividend. Deutsche Bank has a $73 price target, while the consensus price target is posted at $77.70. The stock was last seen trading at $65.05 a share.
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U.S. Steel
This venerable steel producer remains a favorite on 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 are paid a 0.56% dividend. The $47 Deutsche Bank price target is near the $46.85 consensus target. The shares were trading at $35.90.
Reliance Steel & Aluminum
Deutsche Bank also 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 are 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 2.22% dividend. Deutsche Bank has set its price target at $100. The posted consensus target is $101.13, and the stock traded at $91.90.
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Steel Dynamics
This is another company that Deutsche Bank 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 1.6% dividend. The Deutsche Bank price target is $51. The consensus is posted at $53.50, and the stock traded at $47.55.
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The weak dollar has been very helpful to the industry for the past 18 months but has begun to strengthen as the Federal Reserve interest rate increases are kicking in, so that tailwind is diminishing. With pricing firm, and export potential and demand at home still strong, all these stocks make sense for growth investors, especially after significant price pullbacks.
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