Volatility has headlined the market year-to-date, and there have been few places for investors to hide. It’s been a tough stretch, to say the least.
Supply chain problems, geopolitical issues, and a hawkish Fed have been the impactful driving forces behind many of the valuation slashes we’ve seen year-to-date. It goes without saying that we’ve found ourselves in a highly unique economic environment coming out of a once-in-a-lifetime pandemic.
In all the gloom and doom, there are still stocks worth buying. Following the lifting of stay-at-home orders and COVID-19-induced lockdowns, steel demand has gained significant traction in the end-use market.
Two highly-ranked steel producers include Commercial Metals Company (
CMC Quick Quote CMC - Free Report) and Nucor Corp. ( NUE Quick Quote NUE - Free Report) . The chart below illustrates the year-to-date performance of both companies while blending in the S&P 500 as a benchmark. Image Source: Zacks Investment Research
As we can see, both companies’ shares have provided a valuable layer of defense and have all outperformed the S&P 500 by a wide margin.
The story remains the same after widening the timeframe to encompass a year’s worth of price action – both companies have outperformed the S&P 500 quite handily.
Image Source: Zacks Investment Research
The strong share performance bodes well for both companies. Additionally, both companies reside in the Zacks Steel – Producers Industry, which currently ranks in the top 34% of all Zacks industries. Companies residing in the top 50% of all Zacks industries have extensively outperformed those in the bottom 50%.
Let’s examine each one a little closer to see why they would be solid bets to capitalize on a surge in steel demand.
The steel industry is a cyclical business. What does that mean? A cyclical business is affected by macroeconomic changes within the overall economy. Generally, they follow the expansion, peak, recession, and recovery cycles.
They have their ups and downs, alluding to why they are coined as cyclical. During their strongest periods, when earnings are at their peak, their price-to-earnings ratios are at their lowest.
When earnings are at their lowest, P/E ratios are at their highest. It’s a vital factor to recognize, and it helps explains why these companies’ P/E ratios are so low.
NUE Quick Quote NUE - Free Report) is a leading producer of structural steel, steel bars, steel joists, steel deck, and cold-finished bars in the United States. The company is a Zacks Rank #2 (Buy) with an overall VGM Score of an A.
The company has consistently exceeded bottom line expectations, recording eight EPS beats out of its last ten quarterly reports. Over its previous four quarterly reports, the company has surpassed EPS estimates by an average of 2.2%, and in its latest quarter, the company beat on the bottom line by a respectable 4.4%.
The $8.65 per share estimate for the upcoming quarter reflects a substantial 71% expansion in the bottom line from the year-ago quarter. Additionally, the FY22 EPS estimate of $29.75 pencils in a significant 28% increase in earnings year-over-year.
Quarterly sales are pegged to increase to $11.4 billion for the quarter, a 30% growth in revenue from year-ago quarterly sales of $8.8 billion. Furthermore, FY22 revenue estimates of $42 billion display a substantial 16% expansion of the top line year-over-year.
The company’s forward earnings multiple resides at 3.6X, a fraction of its 2020 high of 27.7X and well below its five-year median of 10.5X.
Image Source: Zacks Investment Research Commercial Metals Company
Commercial Metals Company (
CMC Quick Quote CMC - Free Report) manufactures, recycles, and markets steel and metal products, related materials, and services. The company is a Zacks Rank #1 (Strong Buy) with an overall VGM Score of a B.
The company has been on a blazing-hot earnings streak, exceeding bottom line expectations in nine of its last ten quarters. Over its previous four, CMC has beat EPS estimates by an average of 15%, and in its latest quarter, the company beat bottom-line estimates handily by 25%.
Growth rates for FY22 appear robust for both the top and bottom lines. The $8.93 EPS estimate for FY22 reflects a massive triple-digit growth in earnings of 150% year-over-year. In addition, the $2.20 EPS estimate for the upcoming quarterly release represents a sizable 75% expansion in the bottom line from the year-ago quarter.
Zacks Consensus Sales estimate for the upcoming quarterly release is pegged at $411.4 million, notching a 25% increase from year-ago quarterly sales of $327 million. Furthermore, the FY22 sales estimate of $1.5 billion reflects a notable 19% growth in revenue year-over-year.
CMC’s current forward earnings multiple resides at 4.5X, a fraction of its high of 23.2X in 2017 and nicely below its five-year median value of 9.6X.
Image Source: Zacks Investment Research Bottom Line
Both companies are set up perfectly to reap the rewards from a higher level of steel demand upon coming out of the pandemic. In addition, they both carry strong Zacks Ranks, making them appear even more enticing.
It’s vital to remember that steel is a cyclical business that will have its ups and downs. When looking at FY23 estimates for both companies, the earnings picture drastically slows down.
Both stocks would be ideally suited for investors seeking exposure to the steel industry during a period of high demand.