The steel industry recovered from its pandemic lows last year, driven by the resumption of manufacturing and industrial activities worldwide. Steel prices reached record highs in 2021, thanks to increased global demand. This trend is expected to continue in 2022, with growing demand from the construction, automobile, and manufacturing industry. According to Precedence research, the structural steel market is projected to reach $226.9 billion by 2030, growing at a 6.3% CAGR.

Given these factors, we think it advisable to invest in Steel Dynamics, Inc. (STLD) and United States Steel Corporation (X), which possess high growth potential.

However, steel prices declined slightly last month due to overproduction. The steel industry overproduced last year, resulting in a buildup of inventory and a price correction. So, we think fundamentally bleak steel stocks Cleveland-Cliffs Inc. (CLF) and Algoma Steel Group Inc. (ASTL) are best avoided.

Stock to Buy:

Steel Dynamics, Inc. (STLD)

Steel Dynamics is a leading steel producer and metal recycler in the U.S. The Fort Wayne, Ind., company operates in three segments: Steel Operations; Metals Recycling Operations; and Steel Fabrication Operations. It has a production capacity of more than 13 million tons of steel and is one of the largest producers of carbon steel products in the U.S.

On Jan. 31, 2022, STLD acquired a 45% minority interest in New Process Steel, a metals solutions and distribution supply-chain management company. With the acquisition, STLD is expected to expand its exposure to value-added manufacturing growth opportunities and boost the company’s margins.

In its fiscal year 2021 fourth quarter, ended December 31, STLD’s net sales increased 104.2% year-over-year to $5.31 billion. Its gross profit increased 298.4% year-over-year to $1.76 billion. The company’s operating income rose 452.3% from the same period last year to $1.43 billion. And its net income increased 456.3% from the year-ago value to $1.10 billion. The company’s net income attributable to Steel Dynamics, Inc. grew 480.5% year-over-year to $1.09 billion, and its earnings per share increased 516.9% from the year-ago value to $5.49.

Analysts expect STLD’s revenue for its fiscal first quarter, ending March 2022, to come in at $5.26 billion, representing a 48.3% rise year-over-year. The Street expects the company’s EPS for the first quarter to be $5.29, representing a 152% increase year-over-year. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.

Shares of STLD have gained 55% in price over the past year and closed yesterday’s trading session at $58.33.

STLD has an overall B rating, which translates to Buy in our POWR Ratings system. It has a B grade for Value, Growth, Quality, and Momentum. It is ranked #22 of 35 stocks in the A-rated Steel industry. Click here to see STLD ratings for Sentiment and Stability.

United States Steel Corporation (X)

X produces and markets flat-rolled and tubular steel products primarily in North America and Europe. The Pittsburgh, Pa. company operates through three segments: North American Flat-Rolled (Flat-Rolled); U.S. Steel Europe (USSE); and Tubular Products (Tubular). X serves customers in the construction, appliance, electrical, conversion, service center, oil, gas, and petrochemical markets.

Last month, X invested in Carnegie Foundry, a leading robotics and AI studio, to accelerate and scale industrial automation driven by advanced robotics and AI. With the partnership, X might bring innovation in robotics and autonomous solutions for the industry and increase profitability for its customers and the company.

Also in January,  X announced its advanced and highly sustainable steelmaking facility located in Osceola, Arkansas. This new optimized steel production facility is expected to bring significant energy, efficiency, and capability enhancements to X’s operations by the first use of endless casting and rolling technology and a $3 billion project to yield benefits to customers, stockholders, and communities.

X’s net sales increased 119.4% year-over-year to $5.62 billion in the fiscal fourth quarter, ended Dec. 31, 2021. X’s adjusted EBITDA grew 1886.2% year-over-year to $1.73 billion. Its adjusted net earnings improved 1830% year-over-year to $1.04 billion. And the company’s adjusted net earnings per share increased 1448.1% from the year-ago value to $3.64.

The $5.47 billion consensus revenue estimate for the fiscal first quarter, ending March 2022, represents 49.2% year-over-year growth from the same period last year. The $4.07 consensus EPS estimate for the current quarter indicates 277% year-over-year growth from the same period in 2021.

Over the past year, the stock has gained 34% in price to close yesterday’s trading session at $22.18.

X’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. X has an A grade for Value and a B for Growth, Quality, and Momentum. Within the Steel industry, it is ranked #20 of 35 stocks. To see additional component grades of POWR Ratings (Stability and Sentiment) for X, click here.

Stocks to avoid:

Cleveland-Cliffs Inc. (CLF)

CLF is a leading flat-rolled steel producer and iron ore pellet manufacturer in North America. The Cleveland, Ohio, company’s integrated portfolio includes custom-made iron ore pellets; carbon and stainless tubing; hot and cold stamping and tooling; flat-rolled carbon steel, electrical, plate, tinplate, and long steel products.

In December, CLF redeemed its 1.50% senior convertible notes due 2025. The company intended to pay all the outstanding principal amounts in cash. The senior notes redemption is expected to reduce the company’s cash balance.

For its third fiscal quarter, ended September 30, CLF’s total operating costs increased 170.8% year-over-year to $4.36 billion. The company’s cash and cash equivalents declined 62.5% over the period of nine months ended September 30, 2021, to $42 million.

CLF has missed consensus EPS estimates in three out of the trailing four quarters.

The stock has declined 12.7% in price year-to-date and 20.9% over the past six months and closed yesterday’s trading session at $19.

This bleak outlook is reflected in CLF’s POWR Ratings. CLF has a Sentiment grade of D and a Stability grade of F. It is ranked #29 out of 35 stocks in the Steel industry.

In addition to the POWR Rating grades we have stated above, one can see CLF ratings for Growth, Momentum, Value, and Quality here.

Algoma Steel Group Inc. (ASTL)

ASTL produces and sells steel products primarily in North America and is headquartered in Sault Ste. Marie, Canada. The company offers flat and sheet products, including cold-rolled, hot-rolled, floor plate products for the automotive industry and plate steel products for the manufacturing industry.

Last December, ASTL selected Danieli as the sole technology provided for ASTL’s new electric arc (EAF) steelmaking facility. ASTL opted for Danieli due to its proven AC-Digimelter technology powered by Q-One digital power systems. The company is expected to take some time to realize gains from this new green steel making facility.

For its second fiscal quarter, ended September 30, ASTL’s cost of sales increased 48.5% year-over-year to CAD578.70 million ($455.26 million). Cash outflow from investing and financing activities amounted to CAD25.10 million ($19.75 million) and CAD14.30 million ($11.25 million), respectively.

The stock has declined 19% in price year-to-date and 15.4% over the past six months. ASTL closed yesterday’s trading session at $8.76.

It is no surprise that ASTL has a D grade for Sentiment in our POWR Ratings system. Within the Steel industry, it is ranked #32 of 35 stocks. To see additional POWR Ratings (Growth, Quality, Stability, Value, and Momentum) for ASTL, click here.

STLD shares were trading at $60.79 per share on Tuesday morning, up $2.46 (+4.22%). Year-to-date, STLD has declined -2.06%, versus a -5.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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