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Zacks Industry Outlook Highlights: Nucor Corp., Steel Dynamics, Ternium and United States Steel

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·10 min read
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For Immediate Release

Chicago, IL – October 20, 2021 – Today, Zacks Equity Research discusses Steel, including Nucor Corp. NUE, Steel Dynamics, Inc. STLD, Ternium S.A. TX and United States Steel Corp. X.

Link: https://www.zacks.com/commentary/1812205/4-steel-producer-stocks-to-play-the-industry-strength

The Zacks Steel Producers industry is currently enjoying a boom after being hobbled by the fallout from the coronavirus pandemic last year, courtesy of a strong revival in demand across major steel-consuming industries and an upswing in steel prices.

Solid demand for steel in the key end-markets such as automotive and construction represents a tailwind for the industry. Steel prices have also witnessed a significant rally on robust demand and supply constraints. Nucor Corp.Steel Dynamics, Ternium and United States Steel are well placed 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?

Demand Strength in Major End-use Markets: Steel producers are set to gain from an upswing in demand across major steel end-use markets such as automotive, construction and machinery from the coronavirus-led downturn. The pandemic-led demand destruction put a dent on the steel industry for much of the first half of last year.

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 is being driven by strong customer demand.

Steel makers are benefiting from healthy order booking from the automotive market despite the semiconductor shortage. The construction sector has also bounced back on the heels of a resumption of projects that were stalled due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient. As these major markets recover, the demand for steel is expected to go up.

Higher Steel Prices to Drive Margins: Steel prices have witnessed an unprecedented surge on the back of an upturn in demand across key markets, tight supply conditions and low steel inventory throughout the supply chain. 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.

The benchmark hot-rolled coil (HRC) prices started to recover in September on U.S. steel mills’ price hike actions, tight supply and surging end-market demand. Notably, HRC prices have shot up more than four-fold from the August 2020 low.

A key reason behind the spurt in U.S. steel prices is the demand-supply imbalance. There is room for further gains in HRC prices as demand continues to outpace supply. As such, higher prices are expected to drive profitability and cash flows of steel-producing companies going forward.

Slowdown in China’s Steel Demand 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 slowdown in construction and manufacturing activities has led to the contraction of demand for steel in China.

Manufacturing is being hurt by semiconductor shortages, supply chain disruptions and power outages. Beijing’s actions to take the heat out of its property market this year partly through credit tightening measures is also a concern for the country’s steel industry.

The debt crisis at one of China's top property developers, Evergrande, also increases the risk of a financial contagion in the country’s property sector. This may lead to a slump in construction activities and a slowdown in the launch of new properties in China, thereby hurting steel demand. 

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 #30, which places it at the top 12% 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 rallied 85.7% over this period compared with the S&P 500’s rise of 32.3% and the broader sector’s increase of 24.1%.

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 5.39X, below the S&P 500’s 15.99X and the sector’s 8X.

Over the past five years, the industry has traded as high as 11.52X, as low as 4.8X and at the median of 7.56X.

4 Steel Producers Stocks to Keep a Close Eye On

Nucor: Charlotte, NC-based Nucor, carrying a Zacks Rank #1 (Strong Buy), makes steel and steel products with operating facilities in the United States, Canada and Mexico. The company is benefiting from strength in the non-residential construction market and a strong recovery in the automotive market. It is also seeing improved conditions in heavy equipment, agriculture and renewable energy markets.

Higher demand is supporting its shipments. Nucor should also gain considerable market opportunities from its strategic investments in its most-significant growth projects. It remains committed to boosting production capacity, which should drive profitable growth and strengthen its position as a low-cost producer. You can see the complete list of today’s Zacks #1 Rank stocks here.  

Nucor has an expected earnings growth rate of 581.1% for the current year. The Zacks Consensus Estimate for earnings for the current year has been revised 26.5% upward over the last 60 days. It has seen its shares shoot up around 111% over a year.

Steel Dynamics: Based in Indiana, Steel Dynamics is a leading steel producer and metals recycler in the United States, carrying a Zacks Rank #1. It is benefiting from momentum across the automotive and non-residential construction sectors. Higher prices aided by strong demand are also expected to drive the profitability of its steel operations. Steel Dynamics is also currently executing a number of projects that should add to its capacity and boost profitability.

The company has expected earnings growth rate of 501.4% for the current year. The consensus estimate for the current year has been revised 16.3% upward over the last 60 days. The stock has also rallied roughly 96% over the past year.

Ternium: The Luxembourg-based company, carrying a Zacks Rank #1, is a leading producer of flat and long steel products in Latin America. It is expected to benefit from strong demand for steel products and higher realized steel prices. Its shipments in Mexico are likely to be aided by strong demand from industrial customers.

Healthy demand for construction materials is also expected to support shipments in Argentina. Ternium is also benefiting from the cost competitiveness of its facilities. The company is also taking actions to boost liquidity and strengthen its financial position in the wake of the pandemic.

Ternium has an expected earnings growth rate of 460.6% for the current year. The consensus estimate for the current year also has been revised 6.6% upward over the last 60 days. It also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 77.1%. The stock has surged roughly 114% over the past year.

U.S. Steel: Pennsylvania-based U.S. Steel produces and sells flat-rolled and tubular steel products and carries a Zacks Rank #2 (Buy). It is gaining from strong demand across end markets and higher domestic steel prices. It is witnessing strong consumer-driven demand and pent-up infrastructure demand. 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 drive its results.

The company has expected an earnings growth rate of 381.8% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 11.9% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters at an average of 25.1%. The stock has shot up around 148% over a year.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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