The financial news lately has been dominated by stories about global trade, tariffs and the prospect of a trade war. In March, President Trump imposed a 25% tariff on imported steel and 10% on important aluminum. Canada, Mexico and the European union were granted temporary exemptions. At the end of May, the Trump administration rescinded those exemptions and officially imposed 25% tariffs on steel imported to the U.S. from Canada, Mexico and the E.U.
China and the E.U have initiated official complaints to the World Trade Organization regarding the tariffs, which they deem a violation of WTO rules. Trump claims the tariffs are allowed as they serve a national security purpose.
China and Canada have responded with retaliatory tariffs of their own on American-made goods.
One widespread criticism of Trump’s trade policy is that the imposition of tariffs essentially picks “winners” and “losers” in U.S industries as the companies who’s products are the subject of protection can now operate with reduced foreign competition and/or raise prices so that they are commensurate with the more expensive imports. Industries who rely on export business will lose as they see reduced demand for their products abroad as a result of the retaliatory tariffs.
Economists differ widely about the likelihood of success resulting from protective trade policies and also about the potential for long-lasting damage to the U.S. economy and trade around the globe. A recent poll shows that only 29% of Americans support the tariffs if they raise the cost of living.
By and large, the equity markets have not responded well to each recent news item about trade.
However you may feel personally about the tariffs and protectionist trade policies in general, when winners and losers are being chosen by government policy, as an investor it only makes to examine whether the “winners” represent an attractive opportunity.
In the steel industry, those winners are likely to be U.S companies who will not be widely subjected to the tariffs on imports that their competition will face, and international companies who sell steel mostly to the world markets and will not have extensive exposure to the U.S. tariffs.
Let’s take a look at the best-in-class of each type of company.
The Domestic Upstart
In the U.S., Schnitzer Steel (SCHN - Free Report) specializes in the collection, processing and sale of recycled steel, along with other metals. The company melts and reshapes steel scrap into new products with significant economic and environmental advantages over using newly mined ore.
In their last investor presentation, Schnitzer highlighted that the prices they are receiving for finished products were already on the rise.
Shares of Schnitzer have been climbing steadily since the May 1st tariff announcement. When they report quarterly results on June 25th, they are expected to have earned $0.89/share, an increase of 41% over the same quarter in 2017. That Zacks Consensus Earnings Estimate has risen from just $0.61/share over the past 90 days. SCHN is a Zacks rank #1 (Strong Buy).
Schnitzer also pays an attractive 2.1% dividend yield which the company has distributed each quarter since its IPO in 1993.
The Global Steel Leader
Luxembourg-based Arcelor Mittal (MT - Free Report) is the world’s largest producer of steel with annual volumes of over 110 million tons – approximately 10% of world production.
Born from the merger of European producer Arcelor and Indian giant Mittal Steel in 2006, MT is involved in all aspects of production including mining, refining, finished product sales and R&D into new metal technologies. The company operates in 60 countries across the globe.
MT shares have risen from $10/share at the beginning of 2016 to recent highs of $35/share recently thanks to 9 consecutive positive earnings surprises.
The Company reports a favorable business outlook even in an environment of global trade uncertainty with minimal reliance on sales growth in the U.S. and especially strong outlook for improved demand in Brazil.
Thanks to a Zacks Consensus Earnings Estimate that has grown almost 20% in the last quarter, Arcelor Mittal is a Zacks Ranks #1 (Strong Buy).
Making Lemons into Lemonade
We hear it so often that it’s become a cliché – the markets despise uncertainty. Changes in trade policies have been rattling the broad markets recently and the situation continues to develop on a daily basis. While global trade is not a zero-sum game, there will definitely be companies who benefit most (or hurt least) from the Trump administration’s current strategies. These two top-ranked steel stocks certainly look to be in the “winners’ column so far.
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