On Monday, Goldman Sachs upgraded the whole steel sector from Cautious to Neutral and specifically upgraded small cap and mid cap steel stocks AK Steel Holding Corporation (NYSE: AKS), United States Steel Corporation (NYSE: X) and Steel Dynamics Inc. (NASDAQ: STLD) to Buy with price targets of $6, $30 and $22, respectively, but should you go for one of these individual steel stocks or for the Market Vectors Steel ETF (NYSEARCA: SLX)? To begin with, Goldman Sachs says that the supply-demand fundamentals for steel are starting to look more appealing as some supply has been taken out plus they have a very bearish view on input costs (as in iron ore) – which bodes well for steel producers in the long run. Moreover, recently filed trade cases could provide some tailwind – if they are successful. Of course a rising tide can lift all ships, but Goldman Sachs suggests that you go for the following small cap or mid cap steel stocks:
AK Steel Holding Corporation. A world leader in the production of flat-rolled carbon, stainless and electrical steel products, primarily for automotive, infrastructure and manufacturing, construction and electrical power generation and distribution markets, AK Steel Holding Corporation operates seven steel plants and two tube manufacturing plants across four states: Indiana, Kentucky, Ohio and Pennsylvania. Last week, the United States District Court for the District of Delaware once again confirmed that AK Steel Holding Corporation's ULTRALUME® advanced high-strength steel product, which helps automakers design lighter, more fuel-efficient vehicles without sacrificing occupant safety, does not infringe upon an ArcelorMittal patent plus earlier in October, the company increased current spot market base prices for all carbon flat-rolled steel products. However, UBS analyst Matt Murphy was recently less bullish on AK Steel Holding Corporation when he recently downgraded the stock from neutral to sell by writing:
"The company has suffered from weak margins and high leverage, compounded by debt and high legacy liabilities. AKS is benefitting from an improving US auto sector; however, it will be some time before it can realize any benefit from its raw materials integration strategy, which is underway. The largest issue we see for AKS is the cash drag from required pension payments notwithstanding an improving economy and rising interest rates."
On Monday, AK Steel Holding Corporation rose 8.7% to $5 (AKS has a 52 week trading range of $2.76 to $5.77 a share) for a market cap of $681.71 million plus the stock is up 8.7% since the start of the year, down 4.8% over the past year and down 64.1% over the past five years.
United States Steel Corporation. An integrated steel producer with major production operations in the United States, Canada and Central Europe and an annual raw steelmaking capability of 29.3 million net tons, United States Steel Corporation manufactures a wide range of value-added steel sheet and tubular products for the automotive, appliance, container, industrial machinery, construction and oil and gas industries. Last week, United States Steel Corporation reported a third-quarter loss of $1.79 billion due to a massive impairment charge on the value of its steel-making operations, but excluding the charge, the loss was smaller than what Wall Street expected while revenues were below predictions. Results were blamed on the slow pace of the "economic recovery," excess global steelmaking capacity and lower prices. However, United States Steel Corporation ended up rising after the earnings call when the CEO announced the closing of parts of Hamilton Works in Canada and coking facilities in Indiana, but the Hamilton Works facilities have been idle since 2010 – meaning investors will probably want to see some more radical cost cutting to get things back on track. Nevertheless, shares have been steadily rising since September when Mario Longhi, a noted cost-cutter, took over the CEO role. On Monday, United States Steel Corporation rose 4.38% to $26.91 (X has a 52 week trading range of $15.80 to $27.33 a share) for a market cap of $3.89 billion plus the stock is up 12.8% since the start of the year, up 29.1% over the past year and up 27% over the past five years.
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Steel Dynamics Inc. A diversified carbon-steel producer, metals recycler and one of the largest American steel companies, Steel Dynamics is one of America's youngest major steel companies as it was founded in 1993, had an IPO in 1996 and then grew to become one of the nation's premier carbon steel mini-mill producers through organic capacity greenfield additions and strategic acquisitions. In mid-October, Steel Dynamics announced third quarter net income of $57 million on net sales of $1.9 billion verses $13 million on net sales of $1.7 billion for the same period last year. The CEO was quoted in the press release as saying:
"We are optimistic, as the demand for high-quality steel products continues to improve, The automotive market remains strong, and manufactured goods continue to strengthen. We remain cautiously optimistic about the nonresidential construction market, as evidence of increased demand is shown by improved shipments of our structural and fabricated steel products."
Steel Dynamics is also scheduled to complete two more sizable organic growth projects before the end of 2013. Otherwise, it should be mentioned that Steel Dynamics has a forward dividend of $0.44 for a pretty good yield of 2.4%. On Monday, Steel Dynamics rose 2.22% to $18.85 (STLD has a 52 week trading range of $12.02 to $18.99 a share) for a market cap of $4.16 billion plus the stock is up 37.3% since the start of the year, up 42.65 over the past year and up 58.1% over the past five years.
With the above in mind, it should be mentioned that the Market Vectors Steel ETF, which tracks the NYSE Arca Steel Index by investing in 27 steel companies, is up 2% since the start of the year, up 10.6% over the past year and up 45.3% over the past five years.
Clearly, all of the technical charts for the above small cap and mid cap steel stocks along with the technical chart for the Market Vectors Steel ETF are looking rather bullish, but the sector or rather the above stocks have their share of headwinds.
Finally, here is the long term chart for all four:
As you can see from the above chart, AK Steel Holding Corporation and United States Steel Corporation have been underperformers while Steel Dynamics has only recently begun to outperform the Market Vectors Steel ETF.
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