Despite Trade Worries, Analyst Sees Steel Industry Earnings Surging: 5 Stocks to Buy

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It has probably been the most discussed economic and political story of 2018, and it is one that probably will stay front and center for some time. After years of huge trade imbalances with our trading partners and years of unbalanced tariffs on many of our manufactured goods, President Trump has put in massive tariffs on foreign products destined for the United States, and that includes steel and aluminum.

How long and how deep the trade war between the United States and its trading partners go is anybody’s guess, but one thing is for sure. Demand for steel in our growing economy is present. And in a new report, Deutsche Bank stays positive on five top companies, likes two into second-quarter earnings, and said this:

Heading into the second quarter 2018 earnings results reporting season we expect aggregate Steel & Service Centers EBITDA to see a ~48% quarter over quarter jump in the second quarter at $2.8 billion and a further ~12% increase in the third quarter to $3.2bn on our forecasts. However, we are not of the view that the cycle will be sustainable but remain broadly constructive on the Steel & Service Center space overall. Focus is expected to be mainly on management’s view on escalating trade frictions and the risk of a steel sheet price correction given the widened premium to global prices inclusive of the Section 232 duties, weakness in cold rolled coil and hot rolled coil spreads, and also the potential cash returns to shareholders.

Commercial Metals

This lesser known stock 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.

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, and that bodes well for the company.

Shareholders receive a 2.19% dividend. The Deutsche Bank price target on the shares is $28, while the Wall Street consensus target is $26.10. The shares closed Tuesday at $21.89.

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.  In addition, global weather catastrophes have also helped continue to drive the need for steel products.

Nucor investors receive a 2.38% dividend. Deutsche Bank has a $73 price target, and the consensus price target is $77.77. The stock closed Tuesday at $64.62. Nucor is expected to report earnings on Thursday.