Despite a small rally in the U.S. dollar recently, the DXY index, which is an index of the value of the United States dollar relative to a basket of foreign currencies, is still trading at the lowest level in years. Toss in the fact that global pricing for steel is extremely strong, and you have a perfect storm for many of the domestic steel companies. With Chinese capacity also a potential positive for the global industry, some analysts feel that some of these various metrics may not be fully factored into current steel and steel stock prices.
A new Merrill Lynch research report points out that recent steel price hikes are gaining traction, and lead times are getting extended. In fact, in some cases, steel sheet ordered today won’t be delivered until October. While some buyers are skeptical the prices can hold, the overall picture is positive.
With industry metrics positive for the top U.S. companies, Merrill Lynch stays positive on four top stocks in the industry. All are rated Buy.
This stock has been sold off recently and offers investors a solid entry point at current levels. AK Steel Holding Corporation (NYSE: AKS) is the sixth largest U.S. steelmaker and has the capacity to produce nearly 7 million tons of a total 110 million tons of U.S. steel capacity. It produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. The company produces flat-rolled value-added carbon steels, including coated, cold-rolled and hot-rolled carbon steel products, as well as specialty stainless and electrical steels in sheet and strip forms.
AK Steel also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial and construction markets; it buys and sells steel and steel products and other materials; and it produces metallurgical coal from reserves in Pennsylvania.
The Merrill Lynch price target for the shares is $9. The Wall Street consensus price objective is lower at $8.18. The shares traded early Thursday at $5.60.
This top steel company could do very well if the economy sees a continued solid pickup this year, and steel will be needed for the border wall. Nucor Corp. (NYSE: NUE) is one of North America’s largest steel producers, with almost 27 million tons of finished steel capacity at 23 mini mills throughout the United States. The company’s downstream steel products business includes rebar fabrication, steel joists/deck, cold finished bars, fasteners, building systems and wire mesh. Nucor also has 5 million tons of scrap processing capacity.
Nucor has always kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially if a huge infrastructure build-out becomes a reality. Some think that demand from the rebuilding of large parts of Houston after Hurricane Harvey could also be a positive.
Nucor investors receive a 2.71% dividend. The $73 Merrill Lynch price target compares with the consensus price target of $69.50. The stock was last seen at $55.25 a share.
Reliance Steel & Aluminum
Merrill Lynch is positive on this top service center play. Reliance Steel & Aluminum Co. (NYSE: RS) provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products. Its primary processing services comprise cutting, leveling, sawing, machining and electro polishing.
The company also fabricates and distributes structural steel components and parts; provides metal components and inventory management services; and distributes alloy, carbon and stainless steel bar and plate products, as well as steel and nonferrous and aerospace metals, including aluminum, steel, titanium, nickel alloys and aluminum bronze, offering full or cut to size materials.
Reliance is the largest metals service center company in North America, operating in more than 200 locations. About half of its business is warehousing and the other half involves some sort of value-add processing or fabricating. Non-ferrous volume comprises about 30% of its annual shipments. The company tends to sell small spot-priced tons to customers, the majority requiring delivery within 24 hours.
Shareholders receive a 2.47% dividend. Merrill Lynch has an $88 price target, while the consensus estimate is $85.50. The stock traded Thursday at $72.60.
This is another company that Merrill Lynch is very positive on. Steel Dynamics Inc. (NASDAQ: STLD) operates six steel mini-mills in Indiana, Virginia, Mississippi and West Virginia. Production capacity has been nearly 10 million tons, of a total 110 million U.S. capacity.
The company makes flat rolled products, special/merchant bars and structural steel products. Steel Dynamics can process about 7 million tons of ferrous scrap and has a downstream operation that processes finished steel.
Shareholders are paid a 1.78% dividend. The Merrill Lynch price target is $42. The consensus target is $43.33, and shares traded at $34.75.
While the dollar won’t stay weak forever, you can bet that the administration would like to keep it weak for the time being. With pricing firm, and export potential and demand at home still strong, all these stocks make sense for growth investors for the rest of 2017.