Commodities & Metals

Barclays and Merrill Lynch Get More Constructive on Top Steel Stocks

This year has been a wild ride for many companies in the metals sector. That is after a rough 2015, as many of the global growth markets have slowed to a crawl. With the bounce that has been seen from the lows in January and February, now some investors are wondering if the worst is over and if there is an opportunity ahead.

Shares of U.S. steel makers traded higher on Tuesday, April 19, after Barclays and Merrill Lynch both selectively decided to raise price targets on some of the companies in the steel industry. One reason cited was rising steel prices. Investors need to keep in mind that some of these ratings come with price targets that are under the current share prices.

Barclays sees industrial activity picking up for this spring and tight domestic supplies and low imports supporting higher steel prices. Merrill Lynch also sees summer prices soaring. The reason that the formal ratings are unchanged, with some rated as Underperform, is that both firms see price hikes not being sustainable.

Investors also need to consider that the Dow Jones U.S. Iron & Steel Index was already up more than 30% so far in 2016.

United States Steel Corp. (NYSE: X) saw its price target raised to $15 from $7 in the Barclays call. Merrill Lynch raised its price objective to $9 from $1 to reflect a sharp EBITDA recovery from higher selling prices and as valuations remain at a trough.

The smaller AK Steel Holding Corp. (NYSE: AKS) saw its price target raised to $3 from $2 by Barclays, while Merrill Lynch raised its price objective to $2.50 from $1.00. AK Steel recently announced price hikes for carbon steel products and stainless steel products.

Steel Dynamics Inc. (NASDAQ: STLD) saw its target get raised to $27 from $22 at Barclays. Merrill Lynch has a Buy rating on Steel Dynamics and raised its price objective to $27 from $24.

Nucor Corp. (NYSE: NUE) saw its price objective get raised to $52 from $47 at Barclays. Merrill Lynch has a Buy rating for Nucor, and the firm raised its target price to $55 from $50.

Before thinking that it is all sunshine, note that Merrill Lynch was not positive on Reliance Steel & Aluminum Co. (NYSE: RS). The firm downgraded it to Underperform from Neutral with a $72 price objective (versus a $73.32 prior close). Still, Merrill Lynch’s new target is $2 higher than the prior one. The firm feels that Reliance’s strong move in share price has taken its valuation well above its historical averages for EBITDA.

Merrill Lynch said:

We raise price objectives for steel mills and distributors under our coverage to reflect higher steel and scrap price forecasts. For Steel Dynamics and Nucor we think volumes should be robust as those minimills seek to maximize exposure to the stronger market even as integrateds keep furnaces idle. We see some further upside to valuation for both, and prefer Steel Dynamics, as it trades at an undeserved discounted multiple to Nucor. Margins for both can see somewhat limited strength, in our view, as scrap prices rise with steel.

Meanwhile integrated Underperform-rated mills, U.S. Steel and AK Steel, tend to have more fixed costs, especially iron ore miner X, yet their fixed-price contracts can limit or at least delay any price upside. Annual contract prices only passed through part of the drop in 2015 prices from 2014, which tends to mute pricing volatility. We now forecast smaller EPS losses, and accordingly raise price objectives for both.

Shares of U.S. Steel were last seen up 2.9% at $19.90, in a 52-week trading range of $61.5 to $27.62.

AK Steel shares were up 3.7% at $5.07. Its 52-week range is $1.64 to $5.93.

Steel Dynamics traded up 1.0% to $24.31, versus a 52-week range of $15.32 to $24.60.

Nucor shares were up almost 1.0% at $50.32, but they hit a new 52-week high of $50.78 earlier in the day.

Shares of Reliance Steel & Aluminum traded down 0.3% to $73.06. Its stock hit a new 52-week high early on Tuesday, and the new 52-week range is $50.08 to $74.19.