UBS Thinks Steel Is Ready to Shine: Stocks to Buy and Sell

October 22, 2013 by Lee Jackson

Pouring molten steel
Source: Thinkstock
The steel industry tends to go with the pulse of U.S. and international economic growth. Mired in slow growth for years, the top steel stocks became relegated to the Wall Street doghouse. They were forced to slow operations to a crawl and furlough workers. New growth in the car and airline business, and a resumption of building primarily in commercial real estate, are starting to heat up the space again.

In a Tuesday research report from UBS, the steel analysts are cautiously optimistic on a return to growth for the steel industry. They believe that steel demand is heating up and the automotive and manufacturing sectors can drive that growth forward. While they expect steel prices actually will fall next year, the producers that have lowered costs and restructured are poised to do very well. Here are stocks to buy and the stocks to avoid in the steel industry.

Nucor Corp. (NYSE: NUE) remains a top stock to buy at UBS. Nucor earned $0.46 a share in the third quarter, up from $0.26 in the first quarter and $0.27 in the second. The sequential jump is impressive and keeps earnings moving in the right direction. Investors are paid a 2.9% dividend. UBS has lifted its price target on the stock recently from $50 to $52. The Thomson/First Call consensus target is at $53. Nucor closed Monday at $50.73.

Steel Dynamics Inc. (NASDAQ: STLD) is the other steel stock to buy at UBS. Solid results from the company’s core steel operations segment were the main driver behind better-than-expected third-quarter results. The strong steel results were driven by higher shipments and larger metal margin (high realized prices and decline in scrap costs). UBS has a $21 price target for the stock, and the consensus is at $18. The stock closed Monday at $18.29.

In this report, the UBS analysts were not very positive on other names for a variety of reasons. They expect that higher fixed and legacy type costs will have a severe impact on some of the other well-known names in the sector. Both Reliance Steel & Aluminum Co. (NYSE: RS) and the venerable United States Steel Corp. (NYSE: X) were downgraded to Neutral ratings. AK Steel Holding Corp. (NYSE: AKS) and ArcelorMittal (NYSE: MT) were downgraded to Sell, based on what UBS called very deteriorating fundamentals.

The solid rise in the U.S. automotive industry bodes extremely well for the top companies there. Both Ford Motor Co. (NYSE: F) and General Motors Co. (NYSE: GM) have had one of the best sales years in a decade. Auto parts makers like TRW Automotive Holdings Corp. (NYSE: TRW) also stand to benefit. With the average age of American consumers’ cars growing every year, the business and sales of these companies are poised to grow for some time. Sales increases will help the top steel names to buy.

Top manufacturing names also will benefit from the improved economy. Boeing Co. (NYSE: BA), Cummins Inc. (NYSE: CMI), Whirlpool Corp. (NYSE: WHR) and Thor Industries Inc. (NYSE: THO) will all ratchet up their use of steel and steel products as things improve.

The steel industry is a deeply cyclical one that depends on economic growth. The past five years have been very tough. Fortunately, many of the executives at these top firms have seen bad times before. Those that planned accordingly and made the right corporate moves are now ready to benefit as business returns.