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Perhaps it would be wrong to say the bright spot. That would mean that it is the only one. And the Steel - Producers industry certainly isn’t the only one. All said and done, investors appear to be horribly pessimistic about the markets in general, which is a sure sign that there are plenty of cheap stocks to choose from.
But the steel producers are a bit of an exception. Because they really have so much going for them this year. So much, in fact, that it’s even easy to ignore the uncertainties that a slower economy, deteriorating consumer spending and rising interest rates could bestow upon our markets. Even if the Fed gets to a 5.5% end-goal (more than what the market’s expecting now) and then sticks with that for a while, the negatives still couldn’t stand up to the positives we are seeing in this space.
The first of these would be pent-up demand in the auto market, which is one of the primary consumers of the commodity. Steelmakers have been talking about it for a while now. Because of supply chain issues and the non-availability of semiconductors, demand from this market has been building up. Depending on which company you’re looking up, they are talking about a swelling order book at good pricing extending into the second half of the year. And now that the other issues have cleared up and there’s a huge drive to switch to EVs in the next few years, it’s safe to say that there’s several years of growth in the cards.
The second factor is government regulations and initiatives, such as the CHIPS Act and the Infrastructure Investment and Jobs Act, both of which are intended to onshore some strategically important manufacturing and increase government spending on public infrastructure. This will, of course, increase demand for steel. While this is a tailwind for several years, market watchers expect some of the spending to start kicking in this year.
The energy crisis is nothing new. Ever since Russia went to war against Ukraine, the global energy markets have gone into a tailspin. The markets were already under pressure catering to pent up demand after the pandemic. With the West’s sanctions on Russia, one of the major energy players is set to move out of the market (effectively). Europe intends to stop using Russian energy at the earliest, but this requires the shifting of supply chains and therefore, significant investment in energy markets.
It’s clear as day that clean energy won’t be up to speed with global demand in the next few years. Therefore, although backstopped by environmentalists and investors alike, energy companies are stepping up to add capacity. Which is so good for steelmakers.
With that as a backdrop, one would expect this group to be trading at rich valuations. But that is not the case as we see below-
Steel Dynamics is a steel producer and metal recycler in the United States.
It trades at 4.5X earnings, a 74.1% discount to the S&P 500 and a 24.4% discount to its own median value over the past year.
The Zacks Rank #1 stock has a B for both value and growth.
TimkenSteel Corporation
This maker of carbon, micro-alloy and alloy steel ingots, bars, tubes and billets, as well as machining and thermal treatment services is trading at 8.4X earnings, which is a 51% discount to the S&P 500 and a 37.5% discount to its own high point over the past year.
The Zacks Rank #1 stock has a Value Score of A and Growth Score of D.
This maker of stainless and specialty steel products is trading at 3.5X earnings, which is a 79.6% discount to the S&P 500 and a 10% discount to its own median level over the past year.
The Zacks Rank #1 (Strong Buy) stock has scored an A for both value and growth (according to our style score system), indicating that it is attractive for investors seeking either value or growth this year.
Nucor produces hot-rolled, cold-rolled, and galvanized sheet steel products; plate steel products; wide-flange beams, beam blanks, and H-piling and sheet piling products; and bar steel products, such as blooms, billets, concrete reinforcing and merchant bars, and special bar quality products.
At 4.7X earnings, Nucor trades at a discount of 72.7% to the S&P 500 and a 39.6% discount to its median level over the past year.
The Zacks Rank #1 stock has a B for both value and growth.
Conclusion
Valuations came down across the industry as analysts adjusted estimates in line with the expected softening of the economy this year. But share prices have been beaten down too far even as some of the above stocks are already seeing upward revisions over the last 30 days. The current valuations and existence of secular tailwinds make this an attractive segment to invest in right now.
One-Year Price Performance
Image Source: Zacks Investment Research
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Nailing the Bright Spot in Turbulent 2023
Perhaps it would be wrong to say the bright spot. That would mean that it is the only one. And the Steel - Producers industry certainly isn’t the only one. All said and done, investors appear to be horribly pessimistic about the markets in general, which is a sure sign that there are plenty of cheap stocks to choose from.
But the steel producers are a bit of an exception. Because they really have so much going for them this year. So much, in fact, that it’s even easy to ignore the uncertainties that a slower economy, deteriorating consumer spending and rising interest rates could bestow upon our markets. Even if the Fed gets to a 5.5% end-goal (more than what the market’s expecting now) and then sticks with that for a while, the negatives still couldn’t stand up to the positives we are seeing in this space.
The first of these would be pent-up demand in the auto market, which is one of the primary consumers of the commodity. Steelmakers have been talking about it for a while now. Because of supply chain issues and the non-availability of semiconductors, demand from this market has been building up. Depending on which company you’re looking up, they are talking about a swelling order book at good pricing extending into the second half of the year. And now that the other issues have cleared up and there’s a huge drive to switch to EVs in the next few years, it’s safe to say that there’s several years of growth in the cards.
The second factor is government regulations and initiatives, such as the CHIPS Act and the Infrastructure Investment and Jobs Act, both of which are intended to onshore some strategically important manufacturing and increase government spending on public infrastructure. This will, of course, increase demand for steel. While this is a tailwind for several years, market watchers expect some of the spending to start kicking in this year.
The energy crisis is nothing new. Ever since Russia went to war against Ukraine, the global energy markets have gone into a tailspin. The markets were already under pressure catering to pent up demand after the pandemic. With the West’s sanctions on Russia, one of the major energy players is set to move out of the market (effectively). Europe intends to stop using Russian energy at the earliest, but this requires the shifting of supply chains and therefore, significant investment in energy markets.
It’s clear as day that clean energy won’t be up to speed with global demand in the next few years. Therefore, although backstopped by environmentalists and investors alike, energy companies are stepping up to add capacity. Which is so good for steelmakers.
With that as a backdrop, one would expect this group to be trading at rich valuations. But that is not the case as we see below-
Olympic Steel, Inc. (ZEUS - Free Report)
Olympus processes, distributes and stores metal products (both steel and aluminum).
It trades at 4.4X earnings, which is a discount of 74.5% to the S&P 500 and 53.6% to its own median value over the past year.
The Zacks Rank #1 stock has a Value Score of A and Growth Score of C.
Steel Dynamics, Inc. (STLD - Free Report)
Steel Dynamics is a steel producer and metal recycler in the United States.
It trades at 4.5X earnings, a 74.1% discount to the S&P 500 and a 24.4% discount to its own median value over the past year.
The Zacks Rank #1 stock has a B for both value and growth.
TimkenSteel Corporation
This maker of carbon, micro-alloy and alloy steel ingots, bars, tubes and billets, as well as machining and thermal treatment services is trading at 8.4X earnings, which is a 51% discount to the S&P 500 and a 37.5% discount to its own high point over the past year.
The Zacks Rank #1 stock has a Value Score of A and Growth Score of D.
Aperam S.A. (APEMY - Free Report)
This maker of stainless and specialty steel products is trading at 3.5X earnings, which is a 79.6% discount to the S&P 500 and a 10% discount to its own median level over the past year.
The Zacks Rank #1 (Strong Buy) stock has scored an A for both value and growth (according to our style score system), indicating that it is attractive for investors seeking either value or growth this year.
Nucor Corporation (NUE - Free Report)
Nucor produces hot-rolled, cold-rolled, and galvanized sheet steel products; plate steel products; wide-flange beams, beam blanks, and H-piling and sheet piling products; and bar steel products, such as blooms, billets, concrete reinforcing and merchant bars, and special bar quality products.
At 4.7X earnings, Nucor trades at a discount of 72.7% to the S&P 500 and a 39.6% discount to its median level over the past year.
The Zacks Rank #1 stock has a B for both value and growth.
Conclusion
Valuations came down across the industry as analysts adjusted estimates in line with the expected softening of the economy this year. But share prices have been beaten down too far even as some of the above stocks are already seeing upward revisions over the last 30 days. The current valuations and existence of secular tailwinds make this an attractive segment to invest in right now.
One-Year Price Performance
Image Source: Zacks Investment Research