The materials industry was mostly ignored by investors last year as companies in this space were severely affected by a drastic decline in economic activities due to COVID-19 related restrictions. However, with the economy’s recovery so far this year, the demand for materials such as iron and steel is rising with the reopening of the industrial and construction sectors. An expected inflationary environment in the near term is also playing a role in boosting demand for materials.
Investors’ interest in the materials sectors is evident in the Materials Select Sector SPDR Fund’s (XLB) 19.2% year-to-date returns compared to the SPDR S&P 500 Trust ETF’s (SPY) 12.8% gains. And continued progress on the vaccination front should drive the demand for materials further with industries returning to full-capacity production. According to the data published by the CDC, 51.8% of the total United States’ population had received at least one dose of COVID-19 vaccine as of June 9.
Given this backdrop, we think it could be wise to bet on shares of fundamentally sound material companies Alcoa Corporation (AA), Quanex Building Products Corporation (NX), and Olympic Steel, Inc. (ZEUS).
Alcoa Corporation (AA)
AA and its subsidiaries, produce and sell bauxite, alumina, and aluminum products worldwide. The company operates through three segments: bauxite, alumina, and aluminum. It offers primary aluminum in the form of alloy ingots or value-add ingots to customers that produce products for the transportation, building and construction, wire, and other industrial markets.
On March 3, AA announced that it was supplying sustainable aluminum to RONAL GROUP for the manufacture of the Audi e-tron GT’s high-performance alloy wheels. With current climate change concerns, the company could witness high demand for its product because the Audi e-tron GT vehicle uses metal from a revolutionary technology that eliminates all direct carbon dioxide emissions from the smelting process.
The company’s revenue increased 20% year-over-year to $2.87 billion for the first quarter, ended March 31, 2021. Its adjusted EBITDA grew 62.3% year-over-year to $521 million, while its adjusted net income increased 206.1% sequentially to $150 million. Also, its adjusted EPS came in at $0.79, up 203.8% sequentially.
For the current quarter, ending June 30, 2021, analysts expect AA’s EPS and revenue to increase 6,150% and 23.7%, respectively, year-over-year to $1.21 and $2.61 billion. It surpassed the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 206.8% over the past year to close yesterday’s trading session at $37.98.
AA’s POWR Ratings reflect this promising outlook. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has an A grade for Growth, and a B grade for Momentum and Quality. Within the Aluminum industry, AA is ranked #3 of 6 stocks.
To see the additional POWR Ratings for AA (Stability, Value and Sentiment), click here.
Quanex Building Products Corporation (NX)
NX provides components for the fenestration industry worldwide. It operates mainly through three segments—North American fenestration, European fenestration, and North American cabinet components. The company’s offerings include flexible insulating glass spacers, window and door screens, cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry.
On February 25, NX announced the addition of a 60,000-square-foot screens facility in Allentown, Pennsylvania. The rising demand for its screens in the region also led to its expanded relationship with ISC Group, a leading sales agency serving the fenestration industry. Thus, the company should witness increasing demand for its screens in the near-term as well.
NX’s total revenues increased 44.2% year-over-year to $270.36 million for its fiscal second quarter, ended April 30, 2021. Its adjusted EBITDA grew 47.7% year-over-year to $32.20 million. Its adjusted net income increased 128.1% year-over-year to $14.60 million. Also, its adjusted EPS came in at $0.43, up 126.3% year-over-year.
Analysts expect NX’s EPS to come in at $0.48 for the current quarter, ending July 31, 2021, which represents a 41.2% year-over-year increase. It surpassed the consensus EPS estimates in each of the trailing four quarters. The company’s annual revenue is expected to increase 23.3% year-over-year to $1.05 billion in 2021. The stock has rallied 97.2% over the past year to close yesterday’s trading session at $26.97.
NX’s POWR Ratings reflect solid prospects. The company has an overall A rating, which translates to Strong Buy in our proprietary ratings system. It has a B grade for Value and Quality.
Click here to see the additional POWR Ratings for NX (Stability, Growth, Momentum and Sentiment).
NX is ranked #5 of 53 stocks in the A-rated Industrial – Building Materials industry.
Olympic Steel, Inc. (ZEUS)
ZEUS processes and distributes metal products internationally. It operates through three product segments: carbon flat, specialty metals flat, and tubular and pipe. It sells processed carbon and coated flat-rolled sheets, coil and plate products, and fabricated parts, among others. ZEUS also provides various processing services, including cutting-to-length, slitting, flattening and sawing, and shearing.
In December 2020, the company acquired the assets of Action Stainless & Alloys, Inc., marking its fourth acquisition over the past three years. This acquisition is expected to help expand ZEUS’ geographic footprint in its specialty metals business and provide additional product and processing offerings.
ZEUS’ net sales increased 30.7% year-over-year to $463.12 million for the first quarter ended March 31, 2021. Its operating income grew 935.4% year-over-year to $31.59 million, while its net income increased 3,611.3% year-over-year to $22.01 million. Its adjusted EPS came in at $1.91, up 3,720% year-over-year.
The company’s EPS is expected to come in at $4.85 in 2021, which represents a 1,832.1% year-over-year rise. It surpassed the Street’s EPS estimates in three of the trailing four quarters. ZEUS’ revenue is expected to increase 108% year-over-year to $516.40 million for the current quarter, ending June 30, 2021. The stock has gained 228.1% over the past nine months to close yesterday’s trading session at $35.99.
It’s no surprise that ZEUS has an overall B rating, which equates to Buy in our POWR Ratings system. The stock has an A grade for Growth, and a B grade for Momentum, Value and Quality.
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AA shares were trading at $37.76 per share on Thursday morning, down $0.22 (-0.58%). Year-to-date, AA has gained 63.82%, versus a 13.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...
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