4 Top Steel Producer Stocks to Buy From a Promising Industry
The Zacks Steel Producers industry is well-poised to benefit from a demand recovery in automotive, a major market, as the semiconductor crisis gradually eases and automakers ramp up production. A resilient non-residential construction market and healthy demand in the energy space also act as tailwinds for the industry.
The sizable infrastructure investment augurs well for the U.S. steel industry. The companies in this space are also expected to benefit from a rebound in steel prices. Players from the industry like Commercial Metals Company CMC, TimkenSteel Corporation TMST, Algoma Steel Group Inc. ASTL and Universal Stainless & Alloy Products, Inc. USAP are set to gain from these trends.
About the Industry
The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products. Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world’s total consumption.
What's Shaping the Future of the Steel Producers' Industry?
Strong Demand in Major End-use Markets Bode Well: Steel producers are set to gain from strong demand across major steel end-use markets such as automotive, construction and machinery. They are expected to benefit from higher-order booking from the automotive market in 2023. Steel demand in automotive is expected to improve this year on the back of easing global shortage in semiconductor chips that weighed heavily on the automotive industry for nearly two years. Low dealer inventories and pent-up demand should also be supporting factors. Order activities in the non-residential construction market remain strong, underscoring the inherent strength of this industry. Demand in the energy sector has improved on the back of strength in oil and gas prices. Favorable trends across these markets augur well for the steel industry.
Auto Recovery, Infrastructure Spending to Aid Steel Prices: Steel prices witnessed a sharp correction globally in 2022 as the Russia-Ukraine conflict, skyrocketing energy costs in Europe, persistently high inflation, interest rate hikes and the slowdown in China due to new COVID-19 lockdowns dampened demand for steel across key end-use markets. Notably, U.S. steel prices tumbled after surging to roughly $1,500 per short ton in April 2022 due to supply concerns stemming from the Russia-Ukraine war. The benchmark hot-rolled coil ("HRC") prices cratered to near the $600 per short ton level in November 2022. The downward drift partly reflects weaker demand and fears of a recession. However, HRC prices have rebounded this year, driven by U.S. steel mills’ price hike actions, low import levels, supply tightness partly due to mill outages and a recovery in demand. A rebound in automotive demand is also expected to boost steel prices this year. The massive infrastructure development project should also act as a catalyst for the American steel industry and U.S. HRC prices in 2023. The sizable federal infrastructure spending should favor the U.S. steel industry, given the expected rise in consumption of the commodity.
Slowdown in China a Worry: Steel demand in China, the world’s top consumer of the commodity, has softened since the second half of 2021 due to a slowdown in the country’s economy. A downturn in the country’s real estate sector contributed to the slowdown. The lingering impacts of new lockdowns are also taking a toll on the world’s second-largest economy. A slowdown in manufacturing activities has led to a contraction in demand for steel in China. The manufacturing sector has taken a beating as the virus resurgence has hurt demand for manufactured goods and supply chains. China has also seen a slowdown across the construction and property sectors. The country’s real estate sector has taken a hard hit from repeated lockdowns. The slowdown in these key steel-consuming sectors is expected to hurt demand for steel over the short term.
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 #52, which places it at the top 21% 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 Sector and S&P 500
The Zacks Steel Producers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 33.1% over this period compared with the S&P 500’s rise of 11.4% and the broader sector’s rise of 6.4%.
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 6.24X, below the S&P 500’s 13.24X and the sector’s 9.03X.
Over the past five years, the industry has traded as high as 11.7X, as low as 2.53X and at the median of 6.12X, 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
TimkenSteel: Ohio-based TimkenSteel engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company is benefiting from a favorable demand and pricing environment, notwithstanding the semiconductor supply-chain disruptions that are affecting shipments to mobile customers. TMST is seeing strong energy demand and continued recovery in its industrial markets. Healthy end-market demand and productivity actions are also aiding its performance. It is gaining from its efforts to improve its cost structure and manufacturing efficiency.
TimkenSteel carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for TMST’s current-year earnings has been revised 37.8% upward over the past 60 days. It has a trailing four-quarter earnings surprise of roughly 16.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TMST
Algoma Steel: Canada-based Algoma Steel is a leading producer of hot and cold rolled steel sheet and plate products. The company is expected to benefit from strong shipments as production from its plate and strip operations has returned to normal levels following upgrades focused on quality improvements. Additional productivity and capacity increases are expected to contribute to increased production. ASTL also remains focused on advancing its Electric Arc Furnace project. The transformative project is expected to meaningfully reduce its annual carbon emissions.
Algoma Steel, sporting a Zacks Rank #1, has an expected earnings growth rate of 37.2% for the current fiscal year. The consensus estimate for ASTL’s current fiscal-year earnings has been revised 25.5% upward over the past 60 days.
Price and Consensus: ASTL
Commercial Metals: Texas-based Commercial Metals, carrying a Zacks Rank #2 (Buy), manufactures, recycles and markets steel and metal products, related materials and services. Robust demand in North America for each of Commercial Metals’ major product lines is expected to reflect in its results. Downstream bidding activity remains strong, indicating a strong pipeline of projects entering the market. Commercial Metals is also implementing price rises across its mill products in response to rapidly rising scrap costs, which will sustain margins. CMC continues to gain from its ongoing network optimization efforts. Moreover, it has solid liquidity and financial position, and remains focused on reducing debt.
The Zacks Consensus Estimate for the current fiscal-year earnings for Commercial Metals has been revised 0.2% upward over the past 60 days. The company has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 10.4%.
Price and Consensus: CMC
Universal Stainless & Alloy Products: Pennsylvania-based Universal Stainless & Alloy Products, carrying a Zacks Rank #2, makes and markets finished and semi-finished specialty steels, including stainless steel, tool steels and other alloy steels. The company is benefiting from strengthening demand in the aerospace market, which is driving its premium alloy sales and the top line. USAP is seeing strong growth in aerospace sales as demand for new airplanes is being driven by a recovery in air travel and higher demand for business jets and freighters. Higher drilling activities are also supporting sales in the oil and gas market. The company is also gaining from higher production levels and pricing actions to offset cost inflation.
Universal Stainless & Alloy Products has an expected earnings growth rate of 160.8% for the current year. USAP has a trailing four-quarter earnings surprise of roughly 33.3%, on average.
Price and Consensus: USAP
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Commercial Metals Company (CMC) : Free Stock Analysis Report
Universal Stainless & Alloy Products, Inc. (USAP) : Free Stock Analysis Report
Timken Steel Corporation (TMST) : Free Stock Analysis Report
Algoma Steel Group Inc. (ASTL) : Free Stock Analysis Report
