After experiencing a price plunge at the beginning of the COVID-19 pandemic due to an economic slowdown, U.S. steel prices have been rising consistently since last summer. Pent-up demand from steel-consuming industries with the reopening of the economy, and supply constraints, have been driving the price increases.
President Biden’s $2 trillion-plus infrastructure package proposal that focuses on reshaping American infrastructure and on the electrification of vehicles is expected to benefit the steel industry significantly over the next few years. Furthermore, the global Structural Steel market is expected to grow at a CAGR of 5.1% over the next five years to reach $779.60 billion by 2025.
Investors’ interest in the industry is clearly evident in The VanEck Vectors Steel ETF’s (SLX) 156.9% returns over the past year versus the S&P 500’s 46.5% gains over this period.
Because small-cap companies typically perform well during phases of economic recovery and growth, we think small-cap steel stocks Mechel PAO (MTL) and Olympic Steel, Inc. (ZEUS) are well positioned to capitalize on industry tailwinds. Their impressive financial results and diverse market reach should help them deliver solid returns in the near-term.
Mechel PAO (MTL)
With a $566.75 million market capitalization of $566.75 million, MTL engages in the mining and production of coal and steel, iron core, and nickel products. The company operates through three business segments: Steel, Mining, and Power. Its Steel segment sells semi-finished steel products, long products in a wide range of steel grades, carbon and stainless flat steel products, and high value-added metal products. It also offers sea, rail, and motor transportation logistics services to third parties.
On April 5, MTL announced that its Southern Kuzbass Coal Company will launch the second section of the longwall 3-1-11’s working area at Sibirginskaya Underground Mine. The company has invested RUB300 million in this project and estimates its industrial coal reserves to be 1.5 million tonnes.
In March, MTL’s Chelyabinsk Metallurgical Plant was named ‘Purveyor to the Moscow Government’ for its work as a supplier to the Russian capital. The plant had supplied 17.40 kilotonne of rail for Moscow Metro’s repairs and modernization.
And in January, MTL signed an agreement with Chelyabinsk regional authorities and invested RUB3 billion to reduce the plant’s waste emissions by 2026. In addition, MTL is also pursuing programs to reduce its impact on nearby water sources and to improve industrial water cleansing.
For the fourth quarter ended December 31, 2020, MTL’s revenue was RUB69.26 billion, which represents an increase of 7.5% year-over-year. MTL produced 1 million tonnes of steel in the fourth quarter, which represents a 17.4% improvement year-over-year. Its revenue from the steel segment was RUB43.13 billion, up 4.3% year-over-year. The company’s operating profit increased 24.4% year-over-year to RUB7.90 billion. Its profit was $RUB16.57 billion for the fourth quarter, compared to a loss of RUB25.96 billion in the third quarter of 2019.
A consensus revenue estimate of $4.48 billion for the fiscal year ending December 2021 represents a 24.5% gain on a year-over-year basis. The stock has gained 20.9% over the past year and 39.7% over the past six months. It closed yesterday’s trading session at $1.97.
It’s no surprise that MTL has an A overall rating, which translates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock also has an A grade for Quality and a B grade for Growth, Value, and Momentum. Click here to see MTL’s ratings for Stability and Sentiment as well.
MTL is ranked #3 of 35 stocks in the A-rated Steel industry.
Olympic Steel, Inc. (ZEUS)
ZEUS provides metals processing and distribution services for a range of customers. The company operates through three segments—carbon flat products, specialty metals flat products, and tubular and pipe products. Its Chicago Tube and Iron (CTI) subsidiary is a leading distributor of steel tubing, bar, pipe, valves and fittings, and fabricates pressure parts for the electric utility industry. It has a market capitalization of $302.57 million.
On March 15, ZEUS paid a regular quarterly cash dividend of $0.02. And in December, ZEUS acquired the assets of Action Stainless & Alloys, Inc. The transaction marked ZEUS’ fourth acquisition over the past three years. Through the acquisition, ZEUS hopes to expand the geographical footprints of its specialty metals business and provide additional product and processing offerings to customers.
ZEUS is scheduled to announce its fiscal 2021 first quarter results on May 7, 2021, before the market opens. Its net sales have increased 3.7% year-over-year to $331.55 million for the fourth quarter, ended December 31, 2020. ZEUS’ operating income came in at $5.37 million, up more than 429% year-over-year. Its net income was $1.79 million, compared to a net loss of $0.89 million for the fourth quarter of 2019. Also, its non-GAAP EPS came in at $0.14 compared to a loss per share of $0.23 for the fourth quarter of 2019.
Analysts expect the stock’s EPS to improve 314.3% for the current quarter, ending June 30, 2021, to $0.75. It has achieved and surpassed the Street’s EPS estimates in three of the trailing four quarters. And its $462.57 million consensus revenue estimate for the current quarter represents an 86.3% rise on a year-over-year basis. Analysts expect the stock’s EPS to grow at 34.3% per annum over the next five years.
The stock has gained more than 221% over the past year and 176.8% over the past nine months. It closed yesterday’s trading session at $27.32.
ZEUS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
The stock has a B grade for Growth, Value, Momentum, and Quality. We have also rated ZEUS for Sentiment and Stability. Click here to access all of ZEUS’ ratings.
ZEUS is ranked #9 in the same industry.
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MTL shares were trading at $2.03 per share on Wednesday afternoon, up $0.06 (+3.10%). Year-to-date, MTL has declined -0.98%, versus a 11.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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