The current scenario for the global steel industry remains challenging with the continuing Euro-zone sovereign debt crisis, slow growth in developed economies, and waning emerging market economies. A sharp decline in demand from China, which had been one of the major demand drivers for steel in recent years, remains the primary concern.
Furthermore, overcapacity has been a perennial problem for the industry. Stiff competition in the United States from cheaper imports and from domestic producers with new or expanded facilities or under-utilized existing facilities continues to result in a significant oversupply of steel compared to demand. This has significantly affected steel prices and consequently the margins of the industry participants.
In the current scenario, the key to stay afloat is to identify and reduce discretionary expenses wherever possible, trim capital spending, defer new capital development programs, divest underperforming assets and focus on high margin products with growth potential.
Despite the negative sentiment, it might be a good idea to bet on a handful of steel stocks that are likely to beat earnings estimates this quarter.
How to Make a Choice?
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings estimates may appear to be a daunting task. However, our proprietary methodology makes it fairly simple. Stocks with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP have the potential to beat earnings estimates in the to-be-reported quarter.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.
Here are three steel stocks that are currently equipped with the right combination of elements to post an earnings beat with their upcoming announcement:
United States Steel Corp. (X - Analyst Report)
Pittsburgh, Pa.-based United States Steel Corporation is a leading steel manufacturer in the U.S. and the fifth largest in the world with a global annual raw steel production capacity of 31.7 million tons.
United States Steel is poised to benefit from cost reduction and revenue maximization efforts that are currently underway. A pick up in non-residential construction as well as ongoing growth in automotive sector will boost its results. Its partnership with specialty alloy maker Carpenter Technology Corporation (CRS - Snapshot Report), to develop lighter high-strength steel for automotive applications, will usher in incremental opportunities in the automotive market and provide a competitive edge.
The company presently carries a Zacks Rank #3 (Hold) and has an Earning ESP of +18.61%.
-United States Steel is set to report its third quarter results before the opening bell on Oct 29.
Vale S.A. (VALE - Analyst Report)
Rio de Janeiro, Brazil-based Vale is the largest producer of iron ore and iron ore pellets and the world’s second-largest producer of nickel. It has exposure to the steel sector through its investments in energy and steel businesses.
In the wake of falling metals and minerals prices, Vale has incessantly focused on cutting its costs to maintain margins. The company is now benefiting from its divestment of its non-profitable and low-margin assets and cutting down research and development (R&D) expenditure some quarters ago. In the first half of 2013, Vale realized savings of $1.6 billion compared with the comparable period last year.
The company presently carries a Zacks Rank #3 (Hold) and has an Earning ESP of +8.07%.
-Vale is slated to report its third quarter results after the closing bell on Nov 6.
CompanhiaSiderurgicaNacional (SID - Analyst Report)
CompanhiaSiderurgicaNacional operates as an integrated steel producer, mainly in Brazil. The company has the annual capacity to produce 5 million tons of crude steel with its steel products catering to the automotive, home appliance, packaging, construction, and steel processing industries.
CompanhiaSiderurgicaNacional has one of the lowest steel production costs in the world, equipping it with an important competitive advantage in the markets where it operates. Its captive sources of raw materials (particularly iron ore), easy access to port facilities and railroads, self-sufficiency in energy generation that has consistently helped in generating high margins, and focus on the Brazilian market with large growth potential make this Zacks Rank #1 (Strong Buy) stock attractive. The company also has an Earnings ESP of +166.67%.
-CompanhiaSiderurgica is expected to report its third quarter 2013 results on Nov 12.
To Sum Up
In order to sustain the challenging conditions in the steel sector, key players are trying every possible means to reduce cost and restructure their business by divesting non core and non profitable assets. The World Steel Association projects global steel usage to rise 3.1% in 2013 to 1.475 Mt based on the premise of an expected recovery in global steel demand led by emerging economies. However, the Eurozone crisis remains an overhang. The steel industry will benefit from the strong momentum in the automotive markets and a turnaround in the so-far faltering construction sector will provide a much-needed boost to the sector.
Nevertheless, investors keen on this sector could safely rely on the stocks that are poised to deliver an earnings beat.