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4 Steel Producer Stocks to Buy From a Rebounding Industry

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Anindya Barman
·9 min read
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The Zacks Steel Producers industry has pulled off a strong comeback from the coronavirus-led slump, buoyed by a revival in demand across major steel-consuming industries and an upswing in steel prices.

An upturn in steel demand in the key end-markets such as automotive and construction represents a tailwind for the industry. Demand in China has also picked up on the back of government stimulus. Moreover, steel prices have gained strength on a strong rebound in demand, elevated input costs and supply constraints. ArcelorMittal (MT), United States Steel Corporation (X), Schnitzer Steel Industries, Inc. (SCHN) and Olympic Steel, Inc. (ZEUS) are well placed to gain from these trends.

About the Industry

The Zacks Steel Producers industry serves a wide range of end-use industries such as automotive, construction, appliance, container, industrial machinery, transportation, and oil and gas with various steel products. These include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products.

What’s Shaping the Future of Steel Producers Industry?

Upturn in Major End-use Markets: Steel producers are set to gain from a recovery in demand across major steel end-use markets such as automotive and construction from the coronavirus-led slowdown. The pandemic-induced demand destruction put a dent on the steel producers industry for much of the first half of 2020. However, steel demand started to pick up from the third quarter of 2020 on a resumption of operations across major steel-consuming sectors following the easing of lockdowns and restrictions across the world. The recovery in the automotive industry has accelerated following virus-led shutdowns on the back of strong customer demand. Automakers are ramping up production in an effort to boost lagging vehicle inventories at dealerships. The automotive rebound is driving demand for flat steel products globally. The construction sector has also bounced back on the heels of a resumption of projects that were stalled earlier due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient. As these major markets recover, demand for steel is expected to go up.

Revival of China’s Steel Demand: China, which came out of the lockdown ahead of other countries, has clawed its way back from the pandemic-triggered slump, aided by government stimulus. A recovery in construction and manufacturing activities is driving demand for steel in China, the world’s top consumer of the commodity. Steel demand is being driven by government spending in infrastructure projects. Beijing is looking to rev up the economy with big infrastructure spending and is taking steps to boost domestic consumption. Government stimulus measures will likely boost China’s steel demand moving ahead, especially in the property and infrastructure sectors.

Steel Prices on an Upswing: Steel prices are leaping on the back of rising demand, supply shortages and higher raw material costs. Notably, U.S. steel prices have staged a strong recovery and hit record levels after cratering to the pandemic-induced multi-year lows in August 2020. Weak end-market demand had put significant pressure on benchmark hot-rolled coil (HRC) prices in July and August. However, HRC prices started to recover in September on U.S. steel mills’ back-to-back price hike actions, tight supply and surging end-market demand. Prices are shooting higher since then and have surged to levels not seen in more than a decade. Higher domestic steel prices have provided a boost to the selling prices of American steel producers including Nucor Corporation (NUE) and U.S. Steel and aided their revenues and margins. A key reason behind the spurt in U.S. steel prices is the demand-supply imbalance. Supply remains restricted due to the idling of blast furnaces and production disruptions associated with mill outages. Steel scrap prices are also on the rise amid tight supply. China’s steel prices have also strengthened on the back of improving domestic demand. Moreover, global steel prices are moving up on higher demand in China. As such, higher prices are expected to drive profitability and cash flows of steel producing companies going forward.

Overcapacity Remains a Concern: The steel producers industry remains hamstrung by sustained oversupply of steel in the market, made worse by surging China production. China accounts for more than half of the global steel output and is a significant contributor to global steel excess capacity. Notably, China’s steel output topped 1 billion tons in 2020 following a production ramp up led by a strong rebound in domestic demand. Rising steel production in China has led to high levels of finished steel inventories in the country. The steel glut has ignited concerns of China flooding global markets with cheap steel exports. As such, China’s steel overcapacity remains an overhang for the short haul.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #104, which places it at the top 41% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500

The Zacks Steel Producers industry has outperformed the Zacks S&P 500 composite over the past year, but lagged the broader Zacks Basic Materials sector over the same period.

The industry has gained 22.1% over this period compared with the S&P 500’s rise of 16.9% and the broader sector’s increase of 25.8%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 10.83X, below the S&P 500’s 17.25X and the sector’s 10.97X.

Over the past five years, the industry has traded as high as 12.33X, as low as 4.78X and at the median of 7.57X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Enterprise Value/EBITDA (EV/EBITDA) Ratio

4 Steel Producers Stocks to Keep a Close Eye on

ArcelorMittal: Luxembourg-based ArcelorMittal is the world’s leading steel and mining company. It is witnessing a rebound in demand, especially in automotive, following the easing of lockdown measures. The company is expanding its steel-making capacity and remains focused on shifting to high-added-value products. Its cost-reduction initiatives will also support profitability.

ArcelorMittal currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for earnings for 2021 for the company has been revised 166% upward over the last 60 days. The stock has also rallied roughly 80% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: MT

Schnitzer Steel: Oregon-based Schnitzer, carrying a Zacks Rank #1, is a leading manufacturer of recycled metal products in North America. Its steel manufacturing operations produce finished steel products. Its productivity improvements and cost cost-reduction actions along with continued commercial initiatives are lending support to margins. The company should also benefit from an improvement in ferrous and nonferrous markets, its debt reductions actions and transition to its new One Schnitzer operating model which designed at increasing its efficiency.

The consensus estimate for earnings for fiscal 2021 has been revised 109.8% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 72.7%. Moreover, the stock has gained around 56% over the past six months.

Price and Consensus: SCHN

U.S. Steel: Pennsylvania-based U.S. Steel produces and sells flat-rolled and tubular steel products and carries a Zacks Rank #2 (Buy). The company should benefit from an improvement in flat-rolled demand in the United States and Europe and higher U.S. steel prices. The investment in Big River Steel is also expected to be accretive to U.S. Steel’s earnings and will generate significant synergies. Cost-saving initiatives and efforts to improve operation efficiency should also drive its results.

The consensus estimate for the current year has been revised 221.8% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 21.6%. It has seen its shares shoot up 121% over the past six months.

Price and Consensus: X

Olympic Steel: Ohio-based Olympic Steel, carrying a Zacks Rank #2, is a leading metal service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. The company is benefiting from its strong liquidity position, actions to lower operating expenses, and strength in its pipe and tube and specialty metals businesses. Moreover, improving industrial market conditions and a rebound in demand are expected to support its volumes.

The consensus estimate for the current year has been revised 57% upward over the last 60 days. The stock is also up roughly 28% over the past six months.

Price and Consensus: ZEUS

5 Stocks Set to Double

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