Commodities & Metals

Why Merrill Lynch Is Growing Much More Bullish on US Steel Stocks

Rising input costs and a more bullish stance on China have created a bullish sentiment in steel stocks recently. One analyst considered these global trends and raised its price targets on U.S. steel companies across the board, expecting some to rise over 30% going forward.

Merrill Lynch has taken a look at a few of the steel companies that operate in the United States, and the firm believes that these stocks could rise handily, considering they have lagged the rising global trend.

The Chinese market has offered a “triple whammy” of positives for global steel:

  • Merrill Lynch estimates 30 million to 40 million tons of illegal high-frequency furnace output was shut by midyear, and more closures are anticipated temporarily to contain smog into the winter months.
  • In anticipation of this supply drop, low Chinese inventory should be restocked.
  • Chinese demand seems poised to remain higher for longer, even after the People’s Congress meets in October, as infrastructure spending can eclipse a smaller property sector.

Higher prices look sustainable near term, given Chinese demand and restocking, plus higher raw materials prices and a weak U.S. dollar. The Hurricane Harvey rebuild can boost sentiment, especially for more construction-levered companies, but historically tangible hurricane benefits have proven to be elusive. Greater scrap supply should be short lived, and destroyed cars are only a small boost to demand.

U.S. Steel Corp. (NYSE: X) stands to be the biggest beneficiary of the rising commodity price forecast view, with fairly fixed costs, aside from met coal annual contracts into 2018, tempered by ample domestic supply. Merrill Lynch upgraded the stock to a Buy rating from Neutral and raised its price objective to $31 from $29, implying upside of about 15% from the most recent closing price. Shares were last seen at $26.83, with a consensus analyst price target of $27.50 and a 52-week trading range of $15.72 to $41.83.

The firm sees risk to Nucor Corp. (NYSE: NUE) results given an extended outage at its Louisiana facility and potential weather disruptions due to its heavy presence in the south. However, third-quarter construction demand should be relatively solid and seasonally strong. Merrill Lynch cut third-quarter earnings estimates to $0.97 per share from $1.09, below Nucor’s implied range of $1.00 to $1.13. The firm has a Buy rating and a $73 price objective, implying upside of 31.5% from the most recent close. Shares were last seen at $54.50, with a consensus price target of $69.21 and a 52-week range of $44.81 to $68.00.

Merrill Lynch believes that Steel Dynamics Inc. (NASDAQ: STLD) is contemplating an acquisition, given recent comments on capital allocation, including on its last conference call. The firm expects decent demand and downstream activity, with FIFO accounting boosting its earnings in a rising price environment. The firm has a Buy rating and its price objective on the stock was raised to $44 from $42, implying upside of 26.5% from the latest closing price. Shares were last trading at $34.02, with a 52-week range of $22.79 to $40.17 and a consensus analyst price target of $43.36.

Commercial Metals Co. (NYSE: CMC) could see some sentiment boost from channel checks reports, suggesting some stocks of imported rebar in Houston could have been destroyed in the hurricane. But the brokerage firm expects imports to remain steep after disappointing trade case results in the first half of 2017. Merrill Lynch has a Neutral rating, but raised its price target to $21 from $20, implying upside of 10.5% from the latest closing price. The stock was last seen at $18.77. Its consensus price target is $21.00, and the 52-week range is $14.58 to $24.64.

After a disappointing second-quarter, Merrill Lynch thinks Reliance Steel & Aluminum Co. (NYSE: RS) third-quarter guidance was conservative, especially given rising scrap prices and rising prices for much of its product mix during the quarter. From nickel surcharges to scrap-driven products to aluminum, this company should benefit in both revenue and margin from a rising price environment. The Buy rating is accompanied by a price objective raised to $89 from $88 to reflect better cash flows and earnings. Shares of Reliance Steel were last seen at $73.50, with a consensus price target of $85.50 and a 52-week range of $65.10 to $88.58.

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