U.S. markets open in 4 hours 20 minutes
  • S&P Futures

    +19.25 (+0.47%)
  • Dow Futures

    +122.00 (+0.36%)
  • Nasdaq Futures

    +84.25 (+0.61%)
  • Russell 2000 Futures

    +22.40 (+1.00%)
  • Crude Oil

    -0.25 (-0.40%)
  • Gold

    +11.80 (+0.68%)
  • Silver

    +0.15 (+0.59%)

    +0.0003 (+0.02%)
  • 10-Yr Bond

    0.0000 (0.00%)
  • Vix

    +0.22 (+1.32%)

    +0.0003 (+0.02%)

    -0.1610 (-0.15%)

    -1,691.81 (-2.62%)
  • CMC Crypto 200

    -5.22 (-0.38%)
  • FTSE 100

    +32.74 (+0.47%)
  • Nikkei 225

    +21.70 (+0.07%)

Morgan Stanley Double Downgrades US Steel, Makes Bullish Turn On 2 Rivals

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Jayson Derrick
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Investors may want to reposition their steel holdings, as prices have dropped 4 percent since their mid-July peak, according to Morgan Stanley.

The Analyst

Morgan Stanley's Piyush Sood made the following rating and price target changes:

  • United States Steel Corporation (NYSE: X) from Overweight to Underweight, price target from $44 to $30.

  • AK Steel Holding Corporation (NYSE: AKS) from Equal-weight to Overweight, price target from $6 to $5.50.

  • Steel Dynamics, Inc. (NASDAQ: STLD) from Equal-weight to Overweight, price target from $50 to $52.

The Thesis

Steel stocks haven't fully capitalized on the run-up in steel prices through July, and now that prices are falling due to seasonality and capacity restarts, any potential tailwinds from pricing have passed, Sood said in an industrywide report. (See the analyst's track record here.)

The benefits from Section 232 tariffs are likely to only last until mid-2019, which suggests that now is the time for investors to become defensive, as cheap stocks can become even cheaper in the near-term, the analyst said.

Given the recent changes in sentiment, Morgan Stanley's 2019 HRC price forecast of $760/t and 2020's forecast of $655/t remain unchanged but stocks should now be valued on a base year of 2020, which is a defensible mid-cycle year, Sood said.

US Steel Double Downgrade

Morgan Stanley's expectations for US Steel heading into Monday's downgrade were for higher 2019 prices and a sharp decline in 2020 due to the costs associated with continued asset revitalization, Sood said. While 2021 and beyond should see improvements at the company level, investors are unlikely to be willing to invest in a steel company today based on catalysts that are "so far out at the top of the price cycle," he said.

US Steel's cost levels throughout 2018 are higher than previously expected, and consensus estimates for $1 billion in 2019 capex are likely short by $200 million, the analyst said. The company's ongoing maintenance work in asset revitalization could in fact lead to more unparalleled outages, he said.

AK Steel: Out Of The Penalty Box

AK Steel's stock has been stuck in the "penalty box" amid poor guidance and concerns over equity issuances, Sood said. Yet the stock has moved lower and investors may want to step up to the buy window for two reasons, the analyst said.

The company should benefit from higher pricing for around 25 percent of contract volume — 60-70 percent of total output — in the fourth quarter, with another favorable reset in the first quarter, Sood said.

Morgan Stanley forecast that an increase in free cash flow yield from 14 percent in the second quarter to north of 20 percent in 2019 and 2020 should bring down leverage from 3.7 times LTM Net Debt to EBITDA to 1.8 times, which may eliminate any need for future equity issuances.

Steel Dynamics: Top Mini-Mill Pick

Mini-mill stocks are more defensive in nature than integrated names when steel prices are showing weakness, the analyst said Steel Dynamics boasts a better track record and stability in earnings versus its mini-mill peers, and its conservative management style and reputation of buying low-performance assets to turn them around implies a better likelihood of value creation for investors, he said.

Price Action

US Steel shares were trading lower by more than 1 percent at the time of publication Monday, while AK Steel was up 3.15 percent higher and Steel Dynamics was 2.49 percent higher.

Related Links:

Goldman: Not All Metal And Mining Stocks Are Created Equal

KeyBanc Urges 'Selective Bias' On Carbon Steel Stocks

Latest Ratings for AKS

Aug 2018

Morgan Stanley




Jul 2018

Deutsche Bank




May 2018

Goldman Sachs




View More Analyst Ratings for AKS
View the Latest Analyst Ratings

See more from Benzinga

© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.