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4 Steel Producer Stocks Set to Ride the Industry's Upturn

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The Zacks Steel Producers industry has clawed its way back from the crisis wrought by coronavirus, taking succour from a recovery across major steel-consuming industries and a rebound in China’s steel demand from the pandemic-induced slowdown.

A revival in steel demand in major end-markets such as automotive and construction represents a tailwind for the industry. Demand in China has also picked up on the back of government stimulus. Moreover, steel prices have gained strength on an upturn in demand. Nucor Corporation (NUE - Free Report) , Companhia Siderurgica Nacional (SID - Free Report) , TimkenSteel Corporation (TMST - Free Report) and Olympic Steel, Inc. (ZEUS - Free Report) are well placed to gain from these trends.

About the Industry

The Zacks Steel Producers industry serves a wide range of end-use industries such as automotive, construction, appliance, container, industrial machinery, transportation, and oil and gas with various steel products. These include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products.

What’s Shaping the Future of Steel Producers Industry

Rebound in Key Steel End-markets: Steel producers are set to gain from a recovery in demand across major steel end-use markets such as automotive and construction from the coronavirus-led slump witnessed in the first half of 2020. Steel demand has picked up of late as operations resume across major steel-consuming sectors, following the easing of lockdowns and restrictions across the word. Notably, the automotive industry has gotten back into gear following pandemic-induced shutdowns. U.S. automakers began resuming production in May 2020 after a nearly two-month shutdown due to the virus crisis. The restart of production is helping resuscitate steel demand in this major market. Automakers are ramping up production to normal levels in an effort to boost lagging vehicle inventories at dealerships. Moreover, the resumption of many projects, which were stalled earlier due to labor shortages and supply chain disruptions amid the pandemic is supporting the revival in the construction sector. As these major markets recover, demand for steel is expected to go up.

Revival of China’s Steel Demand: China, which came out of the lockdown ahead of other countries, is gradually recovering from the fallout of the pandemic. A recovery in construction and manufacturing activities is driving demand for steel in China, the world’s top consumer of the commodity. Steel demand is being driven by government spending in infrastructure projects. Beijing is looking to rev up the economy with big infrastructure spending and is taking steps to boost domestic consumption. Government stimulus measures will likely further boost China’s steel demand, especially in property and infrastructure sectors. A rebound in China’s demand augurs well for companies in the steel producers industry moving ahead.

Steel Prices Stage Recovery: Steel prices have come under pressure this year amid pandemic-induced demand shocks. Notably, a slump in demand led to a downswing in U.S. steel prices. The benchmark hot-rolled coil prices plummeted to below the psychologically important $500 per short ton level in April on concerns over the fast-growing pandemic in the United States and demand slowdown amid production shutdowns by automakers. After gaining some ground during the second quarter on U.S. steel mills’ price hike actions, steel prices again came under pressure in July and August on demand weakness. However, U.S. steel prices are leaping of late on a recovery in end-market demand, especially in automotive, amid tight supply. China’s steel prices have also strengthened on the back of improving domestic demand. Moreover, global steel prices are moving up on higher demand in China. As such, higher prices are expected to lend support to margins of steel producing companies going forward.
 
Overcapacity Remains a Worry: The steel producers industry remains hamstrung by sustained oversupply of steel in the market, made worse by surging China production. China, which now accounts for more than 60% of the global steel output, is a significant contributor to global steel excess capacity. Steel mills in China are ramping up production on a rebound in domestic demand, aided by Beijing’s infrastructure push. Rising steel production in China has led to high levels of finished steel inventories in the country. The steel glut has ignited concerns of China flooding global markets with cheap steel exports. As such, China’s steel overcapacity remains an overhang for the short haul.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Steel Producers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #79, which places it at the top 31% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Steel Producers industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has declined 5% over this period compared with the S&P 500’s rise of 11.3% and the broader sector’s increase of 10.1%.

One-Year Price Performance

 



 

Industry’s Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 10.32X, below the S&P 500’s 14.33X, but above the sector’s 7.84X.

Over the past five years, the industry has traded as high as 10.35X, as low as 4.81X and at the median of 7.59X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio





 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

4 Steel Producer Stocks to Keep a Close Eye on

Companhia Siderurgica Nacional: Brazil-based Companhia Siderurgica is one of the largest fully integrated steel producers in Brazil and among the biggest in Latin America. The company is well placed for growth on its diversified business structure, geographical diversification and a solid product portfolio. Investments in infrastructure improvements by the Brazilian government are also expected to create lucrative market conditions for Companhia Siderurgica.

The Zacks Consensus Estimate for Companhia Siderurgica for current-year earnings has been revised 625% upward over the last 60 days. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: SID

 



 

TimkenSteel Corporation: Ohio-based TimkenSteel engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company is expected to benefit from an improvement in automotive industry orders from the coronavirus-led disruptions. It is seeing an improvement in shipments following the resumption of automotive industry production. TimkenSteel is also taking aggressive cost-saving actions, including reduction of administrative expenses to mitigate the impacts of the pandemic, which is expected to contribute to its bottom line.

TimkenSteel carries a Zacks Rank #2. The Zacks Consensus Estimate for the current year has been revised 45.4% upward over the last 60 days. The company has also delivered an earnings surprise of 28.3%, on average, over the trailing four quarters.

Price and Consensus: TMST

 



 

Olympic Steel, Inc: Ohio-based Olympic Steel is a leading metal service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. The company is benefiting from its strong liquidity position, its actions to lower operating expenses and strength in its pipe and tube and specialty metals businesses. Moreover, improving industrial market conditions and a rebound in demand are expected to support its volumes moving ahead.

Olympic Steel has a Zacks Rank #2. The consensus estimate for the current year has been revised 37.1% upward over the last 60 days.

Price and Consensus: ZEUS

 



 

Nucor Corporation: Charlotte, NC-based Nucor makes steel and steel products with operating facilities in the United States, Canada and Mexico. The company is expected to benefit from the strength in the non-residential construction market. Nucor also remains committed to boost production capacity, which should drive profitable growth and strengthen its position as a low-cost producer. The company is making progress with its growth projects and has already commissioned some of its projects, including the Hickman specialty cold rolling mill. Nucor should gain from considerable market opportunities from its strategic investments in its most significant growth projects — the Brandenburg plate mill and modernization and expansion of the Gallatin sheet mill.

Nucor carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the current year has been revised 22.7% upward over the last 60 days. The company has also delivered an earnings surprise of 55.9%, on average, over the trailing four quarters.

Price and Consensus: NUE

 



 

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