The steel industry is expected to continue the earnings momentum witnessed in the second quarter into the September quarter on the back of favorable demand and pricing fundamentals for steel.
In particular, U.S. steel makers are expected to come up with a strong performance in the third quarter on the back of continued demand strength in major steel end-use markets as well as strong domestic steel prices courtesy of Trump administration’s actions to curb imports.
However, the industry faces risks stemming from heightened U.S.-China trade tussle and a possible cooling of the Chinese economy. The trade war has raised a red flag about a possible slowdown in the Chinese economy. The intensifying trade tensions are likely to weigh on steel demand in China, the world’s top consumer of steel.
Nevertheless, American steel makers continue to gain from strong steel consumption in the domestic market across major industries such as construction and automotive. Higher steel prices should also drive the profitability of U.S. steel makers in the third quarter.
The 25% tariffs on steel imports, which the Trump administration levied in March, have injected a new lease of life for the U.S. steel industry. The tariffs have provided the much-needed protection to American steel producers and instilled optimism in the domestic steel industry which had long struggled to cope with a tide of subsidized foreign imports.
The tariffs are leading to lower imports into the United States. According to the American Iron and Steel Institute (AISI), an association of North American steel makers, total and finished domestic steel imports are down 10.4% and 11% year over year, respectively, year to date (through the first eight months of 2018). For 2018, annualized total and finished steel imports are expected to decline 6.2% and 7.6% year over year, respectively, per the AISI.
The tariffs are also boosting production capacity of domestic steel makers amid lower imports. U.S. steel industry capacity utilization rate broke above the 80% mark (the minimum rate required for the long-term viability of the industry) last month, reflecting the impact of the tariffs, and is currently hovering close to that level.
Moreover, the tariffs have provided a boost to U.S. steel prices, giving American steel makers more pricing power. U.S. steel prices are on an uptrend following the trade tariff announcement, reflected by a spike in hot-rolled steel prices. Higher prices provided a boost to margins of U.S. steel players in the second quarter and the momentum is likely to continue in the third.
Industry Positioning & Earnings Prospects
The Zacks Steel Producers industry currently carries a Zacks Industry Rank #67, which places it in the top 26% of more than 250 Zacks industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Per the Zacks Industry classification, the steel industry is grouped under the broader Basic Materials sector. The Basic Materials sector is among the Zacks sectors that are expected to rack up the strongest gains in the third quarter. Earnings for the sector are projected to surge 34.9% in the third quarter while revenues are expected to go up 14.7%, per our latest Earnings Outlook.
Picking the Winning Stocks
Steel makers are expected to put up a strong performance in the third quarter as the fundamental driving factors remain in place. As such, a sneak peek at the space for some potential winners backed by a solid Zacks Rank could be a great idea for investors looking to gain from the third-quarter earnings season.
With the help of the Zacks Stock Screener, we have shortlisted steel stocks that have an estimated year over year earnings per share (EPS) growth of 10% or more for the to-be-reported quarter. Further, these stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
4 Steel Stocks to Buy
Below we discuss four steel stocks that are worth investing in before the third-quarter earnings season hits full throttle.
Universal Stainless & Alloy Products, Inc. USAP
Pennsylvania-based Universal Stainless sports a Zacks Rank #1. The company has an expected EPS growth of a whopping 2,500% for the third quarter. Earnings estimates for the third quarter have been revised 8.3% upward over the last 60 days. The stock has also gained around 15% over the past year.
Ternium S.A. TX
Our next pick is Luxembourg-based Ternium armed with a Zacks Rank #1. The company has an expected EPS growth of 83.8% for the third quarter. Earnings estimates for the third quarter have been revised 14.4% upward over the last 60 days. The stock also has an expected earnings growth of 48.3% for 2018.
Steel Dynamics, Inc. STLD
Indiana-based Steel Dynamics is another attractive choice carrying a Zacks Rank #2. It has an expected EPS growth 151.5% for the third quarter. Moreover, earnings are expected to register a 109.4% growth in 2018. The company also delivered positive earnings surprise in three of the trailing four quarters, with an average beat of 4.6%. Steel Dynamics has also gained around 20% over a year.
Nucor Corporation NUE
North Carolina-based Nucor sports a Zacks Rank #2. The company has an estimated EPS growth of 197.5% for the third quarter. The stock also has an expected earnings growth of 125.6% for 2018. The company also delivered positive earnings surprise in three of the trailing four quarters, with an average beat of 6.1%.
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