Following a COVID-19 pandemic-led decline, steel prices began recovering in the middle of last year owing to a mix of production cuts and gradually recovering demand. Now, the Biden administration’s anticipated infrastructure spending and a recovery in market conditions from the effects of the pandemic are driving a sharp increase in steel prices. This is evident in VanEck Vectors Steel ETF’s (SLX) 62.8% returns over the past six months.
Global steel demand is forecast to rise by 5.3% year-over-year in 2021. Also, Moody’s Investors Service has revised the outlook for the global steel industry to stable. The momentum in the steel sector is driven mainly by a global recovery in key end-markets, such as automotive, manufacturing, construction and infrastructure, along with some consolidation in major steel markets that is increasing capacity utilization.
Furthermore, the infrastructure sector is expected to be a major avenue of demand for the steel industry in the long run. Federal spending to support infrastructure projects in the United States appears to be the next big priority for the Biden administration following its recent $1.9 trillion coronavirus recovery package. This makes prospects for the steel sector even better because government spending should increase demand significantly.
Against this backdrop, we think Nippon Steel Corporation (NPSCY), POSCO (PKX), Ternium S.A. (TX), and Commercial Metals Company (CMC) are well-positioned to deliver significant returns in the near future.
Nippon Steel Corporation (NPSCY)
Based in Japan, NPSCY operates businesses in four areas: steelmaking and fabrication, engineering and construction, chemicals and materials, and system solutions, with its core business being steelmaking.
On December 22, NPSCY and ArcelorMittal S.A. agreed to build an electric arc furnace at AM/NS Calvert, LLC, a joint venture between NSC and AM. This newly built electric arc furnace (EAF) should enable Calvert to strengthen its competitiveness through advantages of self-manufacture and better productivity.
Last December, NPSCY acquired an approximately 90% stake in Thailand’s Siam Tinplate Co. Ltd., a manufacturer and marketer of tinplate and tin free steel. With rising demand for tinplate, the acquisition is expected to give a significant boost to the company’s financials.
NPSCY’s Crude Steel Production has increased 15.9% sequentially to 21.99 million tons in the third quarter of fiscal 2020 (ending December 31). Its operating profit has improved 81.9% year-over-year, while its EPS has improved 65.4% over the quarter.
A consensus revenue estimate of $13.67 billion for the current quarter (ending March 31, 2021) represents a 0.9% improvement year-over-year. The stock has gained 54.6% over the past six months.
NPSCY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
NPSCY has a B grade for Growth, Value, and Stability. Of the 35 stocks in the A-rated Steel industry, the stock is ranked #16.
In total, we rate NPSCY on eight different levels. Beyond what we’ve stated above, we have also given NPSCY grades for Quality, Momentum and Sentiment. Get all NPSCY’s ratings here.
PKX is a Korea-based company engaged principally in the manufacture and distribution of steel products. The Company operates its business through four segments: Steel, Construction, Trading, and Other segments, which include power plants, information and communication related businesses.
PKX’s total revenues have increased 6.6% sequentially to KRW15.26 trillion in the fourth quarter ended December 31, 2020. Its operating profit has risen 22.7% from the prior quarter to KRW863 billion, yielding an operating margin of 5.7%, which is up 100 basis points over the three-month period.
Analysts expect PKX’s to report EPS of $5.38 in the fiscal 2021 (ending December 31), up 9.8% year-to-year. The stock has gained 60% over the past six months.
PKX’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which translates to a Strong Buy in our POWR Ratings system. PKX has a Sentiment and Value Grade of A and a Stability Grade of B. It is currently ranked #9 out of 35 stocks in the same industry.
Click here to see the additional POWR Ratings for PKX (Momentum, Growth, and Quality).
Ternium S.A. (TX)
Based in Luxembourg, TX manufactures and processes finished and semi-finished steel products and iron ore, which are sold either directly to steel manufacturers, steel processors or end users. The Company operates through two segments: Steel and Mining. TX serves customers active in the automotive, home appliances, HVAC, construction, capital goods, container, food and energy industries through its manufacturing facilities, service center and distribution networks, and advanced customer integration systems.
During the fourth quarter of 2020, the pandemic’s impact on steel demand in the Americas lessened significantly, allowing all of TX’s industrial facilities to return to normal production rates.
TX’s total steel shipments have increased 5.1% year-over-year to 3.07million tons in the fourth quarter ended December 31, 2020. In Mexico, the company’s main steel market, shipments recovered 6.4% year-over-year to 1.64 million tons. Its manufacturing industries continued ramping up their facilities during the quarter, and activity in the construction sector improved slightly.
TX’s net sales have increased 14.7% year-over-year to $2.58 billion, while its ebida has risen 145.2% from its year-ago value to $645.20 million, yielding an ebitda margin of 25%, up 1300 basis points over the three-month period. Its earnings have improved 750% year-over-year to $3.06 over the same period.
Analysts expect TX’s revenues to grow 34.7% year-over-year to $3.06 billion in the current quarter, ending March 31, 2021. A consensus EPS estimate of $2.28 for the first quarter represents a 3900% improvement from the year-ago value. The stock has gained 87.6% over the past six months.
TX has an overall A rating that translates to Strong Buy in our proprietary rating system. TX has a B grade for Quality, Value, and Growth, and an A for Sentiment. Within the same industry, it is ranked #1 of 35 stocks.
In total, we rate TX on eight different levels. Beyond what we stated above, we have also given TX grades for Stability and Momentum. Get all of TX’s ratings here.
Commercial Metals Company (CMC)
CMC manufactures, recycles and fabricates steel and metal products, related materials and services through a network that include seven EAF mini mills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities. The company operates through four segments: Americas Recycling, Americas Mills, Americas Fabrication, and International Mill.
In December, CMC’s micro mill in Mesa, Arizona, began receiving renewable energy from Salt River Project’s new Saint Solar electricity generation plant. This demonstrates the company’s commitment to further reducing its carbon footprint using renewable energy and producing steel from 100% recycled scrap metal. Its participation in the Saint Solar project is expected to establish CMC as an industry leader in sustainable steelmaking.
CMC’s net sales have increased 9% year-over-year to $1.46 billion in the fiscal second quarter, ended February 28, 2021. Its net earnings have increased 4% from their year-ago value to $66.36 million over the same period. The company’s liquidity position as of February 28, 2021 remained strong, with cash and cash equivalents of $367.3 million and availability under the company’s credit and accounts receivable facilities of $693.0 million.
A consensus revenue estimate of $1.58 billion for the current quarter (ending May 2021) represents a 21.6% improvement year-over-year. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 34% over the past six months.
It is no surprise that CMC has an overall B rating, which translates to Buy in our POWR Ratings system. CMC has a B grade for Quality and Value. It is ranked #14 in the same industry.
Click here to see the additional POWR Ratings for CMC (Stability, Growth, Momentum, and Sentiment).
The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
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NPSCY shares were trading at $17.68 per share on Monday afternoon, up $0.68 (+4.00%). Year-to-date, NPSCY has gained 39.21%, versus a 5.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...
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