Will US Steel Create a Rerating of Battered Steel Stocks?

May 3, 2019 by Jon C. Ogg

Despite some still fairly new tariff protections for the steel industry, the global hiccup in growth has been hard on the U.S. steel industry. Oversupply and overcapacity concerns continue to weigh on the steel giants, particularly if you have read about the steel industry in China, where some workers might be getting paid to show up without having to do much work.

If the saying “nothing lasts forever” is really true, maybe the steel segment has a chance to recover. United States Steel Corp. (NYSE: X) is a far cry from being as dominant as it had been in the past. After all, its $2.6 billion market cap this week was about one-third of the peak value within the past two years.

U.S. Steel already announced its Fairfield Works EAF project earlier in 2019, and the $1.2 capital spending plan was on top of an asset revitalization plan of closer to $2 billion. All in, U.S. Steel is targeting a savings of close to $90 per ton on its rounds costs for seamless production.

Earnings before interest, taxes, depreciation and amortization (EBITDA) was $285 million in the first quarter, about $60 million better than its prior guidance. Also worth highlighting was that the $3.5 billion in net revenue was up handily from the $3.15 billion seen this time a year earlier.

The question to ask after U.S. Steel’s revenue and earnings beat their consensus analyst estimates is if a rerating on Wall Street is ready to take place. Before thinking that a V-bottom is being put in place in the steel stocks, note that there have been some muted moves in some of the larger steel stocks, and analysts by and large have so far not been willing to make many bold upside calls. Many of these stocks are still viewed unfavorably or cautiously by Wall Street’s investment banking and research shops.

The pop in U.S. Steel shares was enough, along with a fairly strong market move after the unemployment report, to send its share higher by 11% Friday morning to about $16. That was after opening up over 5% at $15.06, and with a 52-week range of $14.16 to $39.23. That 52-week low was just put in the day ahead of earnings. UPDATE: At 2:00 US Steel shares were up 16.5% at $16.77 on more than 31 million shares.

In short, expectations were rather low for U.S. Steel, and many other steel giants have already reported their earnings. The VanEck Vectors Steel ETF (NYSEARCA: SLX) was last seen trading up 2.6% at $38.60, but its trading volume is quite thin and it has only $60 million in assets under management. It also has felt the carnage of steel stocks, with a 52-week range of $33.66 to $51.92.

The Van Eck Steel ETF website shows that U.S. Steel is no longer even large enough to be counted within the top 10 holdings of the fund. In fact, the largest holdings are technically not even U.S.-based companies even if their American depositary shares are actively traded in the United States. Those top 10 holdings, by weighting, make up about 68.5% of the ETF and were listed as follows as of March 31:

  • Rio Tinto, 12.72%
  • Vale, 11.53%
  • Ternium, 9.08%
  • Vedanta, 6.67%
  • Tenaris, 5.67%
  • ArcelorMittal, 4.70%
  • Reliance Steel & Aluminum, 4.57%
  • Cia Siderurgica Nacional, 4.55%
  • Nucor, 4.53%
  • Steel Dynamics, 4.50%

U.S. Steel has just a 3.44% weighting in this ETF, and it was ranked as the 14th weighting among 26 listed positions.

The following shows how some of the other more well-known U.S.-based steel and related metals companies are doing on the heels of U.S. Steel.

Reliance Steel & Aluminum Co. (NYSE: RS) was last seen up 1.9% at $91.80, in a 52-week range of $68.62 to $97.41. Its market cap is $6.2 billion, and it has a Refinitiv consensus analyst target price of $92.44. The company reported earnings on the morning of April 25, and its shares had traded at $88.82 before the report and closed that day at $91.34. 2:00 UPDATE: shares were up 2.75% at $92.52.

Nucor Corp. (NYSE: NUE) was last seen up 2.1% at $57.12, with a $17.4 billion market cap. The consensus target price is $68.68, and the 52-week range is $49.79 to $68.84. Nucor reported earnings on the morning of April 23, and its shares were at $56.98 ahead of the report and up at $58.62 afterward. 2:00 UPDATE: Nucor was up 3.1% at $57.65.

Steel Dynamics Inc. (NASDAQ: STLD) was last seen up 2.6% at $32.57, with a consensus target price of $39.63. The market cap is $7.3 billion, and the 52-week range is $28.91 to $52.10. Steel Dynamics reported its earnings on the morning of April 22. Shares were at $33.96 ahead of the report and closed at $32.28 on that day. 2:00 UPDATE: Steel Dynamic was up 4% at $33.00.

AK Steel Holding Corp. (NYSE: AKS) was last seen up 4.6% at $2.43, in a 52-week range of $2.05 to $5.40. Its market cap is now just $771 million, and it has a consensus analyst target of $2.81. It reported its earnings on the afternoon of April 29, and its stock was at $2.46 ahead of that report, with the following day’s closing bell seeing it at $2.42. 2:00 UPDATE: AK Steel was up 9% at $2.535.

Cleveland-Cliffs Inc. (NYSE: CLF) was trading up 2.7% at $10.13 late on Friday morning, and it has a 52-week range of $7.22 to $13.10. The market cap is $2.8 billion, and the consensus target price is $13.32. Its earnings report was posted on the morning of April 25, and the shares were at $9.51 the day before and at $9.73 on earnings day’s close. It has seen its shares trade above $10.00 on all but one day since that earnings report. 2:00 UPDATE: Cleveland-Cliffs was up 3.85% at $10.24.

Commercial Metals Co. (NYSE: CMC) was last seen up 2.9% at $17.30, with a $2 billion market cap. The 52-week range is $15.23 to $24.95, and the consensus target price was last seen at $21.15. 2:00 UPDATE: Shares of Commercial Metals were up 4.9% at $17.63.

One position that is not participating in the steel sector rally is Gibraltar Industries Inc. (NASDAQ: ROCK). Its revenues exceeded guidance on Friday morning, but the 5.6% sales gain also came with earnings with net income down 25%. On an adjusted basis that analysts use, the net income and diluted earnings per share were up 10.8% and 7.7%, respectively. The stock was last seen trading down 3.5% at $38.62, in a 52-week range of $31.96 to $49.10. The market cap is $1.24 billion, and the consensus target price was last seen at $46.75.

Olympic Steel Inc. (NASDAQ: ZEUS), with its mere $187 million market cap, was up over 5% at $17.01, in a 52-week range of $13.72 to $24.23.

By and large, the steel sector remains out of favor in 2019. A rerating with higher price targets and stronger analyst ratings likely would require more than just one improvement on the macro front for the time being. That said, the report might be strong enough to clear out some short sellers if they have seen profits already from their downside bets made in prior months.

To put this into further context, shares of U.S. Steel had been down about 20% so far in 2019, and while the remaining larger companies had all been up for 2019, only Cleveland-Cliffs had handily outperformed the market with a 28% gain. All the other larger names were up in the single-digit percentages, compared with gains of about 17% for the S&P 500 and about 13% for the Dow Jones industrials.