If Tariffs Are So Bad Why Are Steel Stocks Still Red Hot?

June 12, 2018 by 247lee

Needless to say, nobody likes to see tariffs imposed anywhere, and despite the all the rhetoric about the president’s actions, the fact of the matter is foreign countries have taken advantages of the U.S. largesse in the trade arena for years. The bottom line is we hold the cards, as the U.S. is the market everybody, especially the Chinese, wants to sell to.

In a new research report from Deutsche Bank, its analysts note that despite the shrill volume of complaints over steel and aluminum tariffs, the backdrop for the sector is amazingly strong. They also maintain, after reviewing some of the second-quarter guidance from companies, that end-market trends remain favorable, and the steel market dynamics are tight.

The analysts also make the point that a flat scrap-metal-pricing environment should support wider spreads for at least the next few months, which should benefit some of the top companies. We screened the Deutsche Bank metals and mining coverage universe, and found four companies rated buy that look like solid picks now.

Commercial Metals
This lesser-known company provides 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. It operates through five segments: Americas recycling, Americas mills, Americas fabrication, international mills and international marketing and distribution.

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

Shareholders are paid a 1.96% dividend. The Deutsche Bank price target on the shares is $26, while the Wall Street consensus is $26.10. The shares closed Monday at $24.44.

This top steel company could do very well if the economy sees a continued pickup this year and the administration’s infrastructure push comes to the forefront. Nucor Corporation (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 and decks, 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, steady growth next year and beyond especially if a huge infrastructure buildout becomes a reality. In addition, global weather catastrophes have also helped continue to drive the need for steel products.

And Nucor investors are paid a very solid 2.27% dividend. The Deutsche Bank price target is $76. That compares with the Wall Street consensus price target of $76.25. The stock closed Monday at $67.08.

Reliance Steel & Aluminum
This is a top steel services play that the Deutsche Bank team is very positive on. Reliance Steel & Aluminum Co. (NYSE: RS) provides metals processing services and distributes a line of about 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 electropolishing.

The company also fabricates and distributes structural steel components and parts; provides metal components and inventory management services; distributes alloy, carbon and stainless steel bar and plate products; and offers steel and nonferrous and aerospace metals, including aluminum, steel, titanium, nickel alloys, and aluminum bronze.

Reliance describes itself as 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 share involves some sort of value-added processing or fabricating. Nonferrous volume comprises about 30% of its annual shipments. The company tends to sell small spot-priced tons to customers, with the majority requiring delivery within 24 hours.

Shareholders receive a solid 2.09% dividend. The Deutsche Bank price target is $100, while the consensus is posted at $102. The stock closed trading on Monday at $95.53.

This is a top small-cap play that could make sense for more aggressive accounts. Ryerson Holdings Inc. (NYSE: RYI) offers a line of stainless steel, aluminum, carbon steel and alloy steels, as well as nickel and red metals in various shapes and forms, including coils, sheets, square and flat bars, plates and tubing.

Ryerson also provides value-added processing and fabrication services, such as sawing, slitting, blanking, cutting to length, leveling, flame cutting, laser cutting, edge trimming, edge rolling, roll forming, tube manufacturing, polishing, shearing, forming, stamping, punching,. It processes materials to a specified thickness, length or width, shape or surface quality.

The Deutsche Bank price target is $13, while the consensus is set at $11.50. Shares closed trading on Friday at $12.20.

The weak dollar has been very helpful to the steel industry for the last 18 months, but the dollar has begun to strengthen as the Federal Reserve’s interest rate increases are kicking in, so that tailwind is diminishing. With pricing firm, and export potential and demand at home still strong, all of these stocks make sense for growth investors despite the tariffs.