Commodities & Metals

Top Analyst Stays Very Bullish on Steel Stocks: 5 to Buy Now

Lee Jackson

Published: October 10, 2017 10:05 am

Last Updated: January 12, 2020 7:21 am

For years the steel industry floundered, caught in a trap of low growth and lack of consistent demand, and what many have thought to be a case of serial dumping from China. With China now making huge cuts to its capacity, and construction continuing to drive demand with a whopping 43% of market share, the industry may be poised for another strong year in 2018.

In a new research report, Deutsche Bank analyst Jorge Beristain makes the case that the administration’s concerns on trade are taking at least a temporary backseat to the campaign promises of tax, health care and immigration reform. The report also notes that the energy sector is providing tailwinds for the industry. This was noted in the research report:

Fortunately, the “Shale Revolution” continues gaining momentum with the US poised to become a major exporter of natural gas and LNG exports. With ~$1t trillion already spent on energy infrastructure over the past decade, spend on new well drilling, new pipelines and export terminals are expected to improve steel demand going forward.

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Seven steel stocks are rated Buy at Deutsche Bank, and the following five look to have the biggest upside potential.

AK Steel

This stock has sold off recently and offers investors a solid entry point at current levels. AK Steel Holding Corp. (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 Deutsche Bank price target for the shares is $10. The Wall Street consensus price objective is much lower at $7.68. The stock were trading early on Tuesday at $5.40 a share.

Commercial Metals

Shares of this lesser known company provide solid value for investors at current trading levels. Commercial Metals Co. (NYSE: CMC) manufactures, recycles and markets steel and metal products, and related materials and services in the United States and internationally.

As one of the leading suppliers to the nonresidential construction sector, Commercial Metals has revived as that area of the market has picked up. The U.S. Architecture Billings Index (ABI), an economic indicator that provides 9-to-12-month growth forecast of nonresidential construction spending activity, which has shown very consistent growth.

Commercial Metals shareholders are paid a solid 2.6% dividend. The $26 Deutsche Bank price target is well above the consensus price objective of $20.11 a share. The stock traded Monday below both levels at $18.70 apiece.

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Nucor

This top steel company could do very well if the economy continues to pick up and the administration’s infrastructure push comes back to the forefront. 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 are paid a very solid 2.73% dividend. Deutsche Bank has a $75 price target on the stock. And the posted consensus price target is at $64.55. The stock traded Tuesday morning at $55.70.

Reliance Steel & Aluminum

Deutsche Bank 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 of Reliance receive a solid 2.41% dividend. Deutsche Bank has set its price target at $95, while the posted consensus target is $85.29. The stock traded Tuesday at $75.40.

Steel Dynamics

This is another stock that Deutsche Bank remains 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 1.75% dividend. The Deutsche Bank price target is $42. The consensus target is $43.33, and the shares were changing hands at $36.10 on Tuesday.

While the U.S. dollar won’t stay weak forever, and that has been a strong tailwind for steel this year, you can bet that the White House would like to see it stay weak for the time being. With pricing firm, and export potential and demand at home still growing, all these stocks make sense for growth investors for the rest of 2017 and into 2018.