A worker prepares molten steel at an ArcelorMittal plant in the Czech Republic.
Martin Divisek/BloombergIt isn’t too late to buy steel stocks, even though shares of basic-materials producers have been among the strongest performers in this year’s market.
Demand for metals and chemicals is coming back as economies revive and governments spend freely. Even the prospect of inflation might auger well for these businesses, if they can raise prices for their products.
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Steel-industry stocks have enjoyed remarkable moves in the last 12 months. Shares of Brazil’s National Steel (ticker: SID) have come back from the dead, rising sixfold, to around $9. Ore supplier Cleveland-Cliffs (CLF) is up fourfold in the same span, to a recent $20.
These strong gains have prompted reminders about the industry’s volatility from analysts used to the booms and busts of commodity markets. But other industry watchers expect the good times to keep rolling at mills run by the likes of United States Steel (X).
On Tuesday, stock in both U.S. Steel and Cleveland-Cliffs got upgrades to Buy from Credit Suisse analyst Curt Woodworth. The metal remains in short supply, says Woodworth, so steel prices will remain firm.
To see just how expensive steel shares are after their big moves, Barron’s looked at 10 global companies whose U.S. stock-market capitalizations exceed $5 billion. Steel is a capital-intensive business, so we looked at their free cash flows—that is, their operating cash flow minus capital spending—for the past 12 months and for next year, using the consensus forecasts among analysts tracked by Sentieo.com.
Betting on Steel
While steel stocks have rebounded in the last year, many remain cheap -- based on forecasts for their free cash flows
Source: Sentieo.com
If next year’s forecasts prove out, many steel stocks aren’t yet expensive. The cheapest—in terms of 2022 free cash flow—is Ternium (TXL), a steelmaker in Mexico, the U.S., and Latin America, whose $40 stock trades at less than three times next year’s forecast. The dearest of the steel stocks is Reliance Steel & Aluminum (RS), whose $167 shares now go for almost eight times the forecast for 2022 free cash flow.
On Reliance’s earnings call for its March quarter, executives at the Los Angeles-based company said that the average selling price for its carbon steel increased 20% sequentially from the December 2020 quarter to the March 2021 quarter.
Wall Street expects the industry’s economics to improve markedly in the next year. As a result, stocks that are trading at 50 to 60 times trailing 12-month free cash flows are at only five to six times next year’s numbers.
The steel fabricator Steel Dynamics (STLD) told investors last month that March quarter prices for flat-rolled steel, and even steel scrap, increased sequentially from December. While its $59 stock trades for 65 times trailing free cash flow, Wall Street’s forecasts place it at just 6.5 times the forecasted number for 2022.
So don’t yet bar the door to these steel producers.
Write to Bill Alpert at william.alpert@barrons.com
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May 06, 2021 at 05:30PM
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Industry Is Rebounding. Steel Stocks Are Still a Steal. - Barron's
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