Why Hoegh LNG (HMLP) is Poised to Beat Earnings Estimates Again
The U.S. steel industry put up a commendable performance in the first quarter. We note that a host of American steel producers including United States Steel Corp. X, Nucor Corp. NUE, Steel Dynamics, Inc. STLD and AK Steel Holding Corporation AKS racked up better-than-expected earnings in the quarter, driven by a rally in U.S. steel prices.
Steel prices have been on an upswing in the United States on the back of the Trump administration’s trade actions to curb imports, reflected by the run-up in hot-rolled steel prices.
The Trump administration, in March, slapped a 25% tariff on steel imports aimed at protecting the U.S. steel industry which had long struggled to cope with a tide of subsidized foreign imports. The tariffs are the result of the U.S. Department of Commerce’s investigations, which were carried out under Section 232 of the Trade Expansion Act of 1962, to determine whether the imports pose a threat to national security.
The tariffs would lead to lower imports into the United States, which would in turn boost demand for American steel and also give domestic steel makers more pricing power.
According to the American Iron and Steel Institute (“AISI”), an association of North American steel makers, total and finished steel imports dipped 3% and 1.7%, respectively, year over year in the first quarter. For 2018, annualized total and finished steel imports are expected to decline 8.8% and 7.6% year over year, respectively, per the AISI.
While there are still uncertainties surrounding exemptions of countries from the Trump tariff orders, there is no denying the fact that the trade actions have instilled optimism in the long-struggling American steel industry. The trade tariffs contributed to a spike in U.S. steel prices, driving the performance of domestic steel makers in the first quarter. The pricing momentum is likely to continue in the second quarter, thereby providing a boost to margins of U.S. steel players.
The Zacks Steel Producers industry has outperformed the broader market (S&P 500) over the past six months. The industry has gained around 26% in this period, topping the S&P 500’s corresponding return of around 5.3%.
In this write up, we run a comparative analysis on two major U.S. steel stocks – Nucor and U.S. Steel – to figure out which one is a better option for investment right now. While Nucor sports a Zacks Rank #1 (Strong Buy), U.S. Steel is a Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank stocks here.
Both Nucor and U.S. Steel delivered forecast-topping earnings performance in the first quarter, buoyed by higher selling prices. Nucor reported a 9% year over year increase in average sales price in the first quarter. Moreover, U.S. Steel swung to a profit in the first quarter on the back of improved results across all three of its reportable segments. The company saw higher average realized prices across its segments in the quarter.
Nucor, during its first-quarter call, noted that it expects its earnings in the second quarter to increase considerably from the first. It expects steel mills segment’s performance to improve sequentially in the second quarter as it continues to see the benefits of price increases.
U.S. Steel, on the other hand, said that it is presently experiencing some operational challenges at its steelmaking facility at Great Lakes Works. As a result, it expects to have an unfavorable EBITDA impact of roughly $30 million on second-quarter results. However, U.S. Steel believes that adjusted EBITDA in the second quarter will be roughly $400 million, reflecting a sequential increase from $255 million in the first quarter.
Let's take a closer look at how U.S. Steel and Nucor are stacked up against each other in terms of certain key metrics.
U.S. Steel’s shares have rallied 95.8% over the past year, outperforming the industry’s gain of 46.8%. On the other hand, Nucor’s shares have gained 17.7% over the same period, underperforming the industry. As such, U.S. Steel clearly scores above Nucor.
Earnings Surprise History
With respect to surprise, U.S. Steel beat estimates in each of the trailing four quarters. In this timeframe, it came up with an average negative surprise of 56.7%. On the other hand, Nucor has beaten the Zacks Consensus Estimate in three of the last four quarters, delivering an average positive surprise of 3.8%.
In terms of earnings growth expectations, Nucor scores way above U.S. Steel. The expected earnings per share growth rate for Nucor for the second quarter currently stands at 69% compared with an expected increase of 4.7% for U.S. Steel.
The debt-to-equity ratio is a good indicator of the financial well-being of a company and is a good proxy for its debt-servicing capacity. U.S. Steel has a debt-to-equity ratio of 74.8, while the industry has debt-to-equity ratio of 66.8. In contrast, with a debt-to-equity ratio of 40.9 Nucor wins this round.
This metric measures the ability of a company to meet its short-term debt obligations efficiently. In other words, it is the ratio of the current level of total assets and versus the current level of liabilities. Here, Nucor is a clear winner with a current ratio of 2.49, which is superior to U.S. Steel’s reading of 1.63.
Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, which is often used to value steel stocks, U.S. Steel looks cheaper compared with Nucor.
In case of Nucor, the trailing 12-months EV/EBITDA ratio is 9.9, which is above its own average of 8.9 in the past one year. Moreover, it is overvalued than the industry that has a reading of 8.1. On the other hand, U.S. Steel is cheaper with a trailing 12-month EV/EBITDA ratio of 5.9.
Nucor has a current dividend yield of 2.31% while U.S. Steel has a dividend yield of 0.53%. Nucor’s dividend yield is also higher than the broader industry’s average dividend yield of 1.44%. Hence, on a comparable basis, Nucor shareholders earned a better dividend yield than U.S. Steel.
Our comparative analysis shows that U.S. Steel holds an edge over Nucor in terms of price performance, earnings surprise history and valuation. However, when considering earnings growth projections, dividend yield, current ratio and debt-to-equity ratio, Nucor seems to be the preferred stock. As the scale is tipped in favor of Nucor, it makes a better investment proposition compared to U.S. Steel.
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