Commodities & Metals

Despite Trade Worries, Analyst Sees Steel Industry Earnings Surging: 5 Stocks to Buy

Lee Jackson

Published: July 18, 2018 8:05 am

Last Updated: January 11, 2020 8:51 pm

It has probably been the most discussed economic and political story of 2018, and it is one that probably will 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, President Trump has put in massive tariffs 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 go is anybody’s guess, but one thing is for sure. Demand for steel in our growing economy is present. And in a new report, Deutsche Bank stays positive on five top companies, likes two into second-quarter earnings, and said this:

Heading into the second quarter 2018 earnings results reporting season we expect aggregate Steel & Service Centers EBITDA to see a ~48% quarter over quarter jump in the second quarter at $2.8 billion and a further ~12% increase in the third quarter to $3.2bn on our forecasts. However, we are not of the view that the cycle will be sustainable but remain broadly constructive on the Steel & Service Center space overall. Focus is expected to be mainly on management’s view on escalating trade frictions and the risk of a steel sheet price correction given the widened premium to global prices inclusive of the Section 232 duties, weakness in cold rolled coil and hot rolled coil spreads, and also the potential cash returns to shareholders.

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.

Shareholders receive a 2.19% dividend. The Deutsche Bank price target on the shares is $28, while the Wall Street consensus target is $26.10. The shares closed Tuesday at $21.89.

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 2.38% dividend. Deutsche Bank has a $73 price target, and the consensus price target is $77.77. The stock closed Tuesday at $64.62. Nucor is expected to report earnings on Thursday.

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 receive a 0.54% dividend. The $47 Deutsche Bank price target is close to the $46.77 consensus target. Shares closed Tuesday at $36.41.

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 2.21% dividend. Deutsche Bank has set its price target at $100. The consensus target is $102.13, and share closed on Tuesday at $90.73. The company is expected to report earnings on July 26.

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 receive a 1.6% dividend. The Deutsche Bank price target is $51. The consensus target is $53.50, and shares closed Tuesday at $46.80.

The weak dollar has been very helpful to the industry for the past 18 months, but it 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.