3 Steel Producer Stocks to Watch in a Promising Industry
The Zacks Steel Producers industry is expected to benefit from an uptick in steel demand in automotive, a major market, driven by a ramp-up in automotive production following the easing of the semiconductor crisis. A resilient non-residential construction market and healthy demand in the energy space also act as tailwinds for the industry.
The sizable infrastructure investment augurs well for the U.S. steel industry. Infrastructure spending and higher end-market demand are also expected to support steel prices. Players from the industry, such as Nucor Corporation NUE, United States Steel Corporation X and Universal Stainless & Alloy Products, Inc. USAP are set to gain from these trends.
About the Industry
The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products. Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world’s total consumption.
What's Shaping the Future of the Steel Producers' Industry?
Strong Demand in Major End-use Markets: Steel producers are set to gain from strong demand across major steel end-use markets, including automotive and construction. They are expected to benefit from higher order booking from the automotive market. Steel demand in automotive is expected to rise on the back of an easing global shortage in semiconductor chips that weighed heavily on the automotive industry for nearly two years. Also, the United Auto Workers (UAW) reached a deal with the Detroit Big Three in November 2023, ending the roughly six-week strike that weighed on the U.S. steel industry due to a slowdown in automotive demand. The resolution to the UAW strikes augurs well for steel demand moving ahead. Meanwhile, order activities in the non-residential construction market remain strong, underscoring the inherent strength of this industry. Demand in the energy sector has improved on the back of strength in oil and gas prices. Favorable trends across these markets bode well for the steel industry.
A Recovery in Steel Prices Bodes Well: Steel prices witnessed a sharp correction globally in 2022 as the Russia-Ukraine conflict, skyrocketing energy costs in Europe, persistently high inflation, interest rate hikes and the slowdown in China due to new COVID-19 lockdowns dampened demand for steel across key end-use markets. After rebounding during the first three months of 2023, the benchmark hot-rolled coil ("HRC") prices tumbled more than 40% from their April 2023 peak of around $1,200 per short ton to below the $700 per short ton level. The downward drift was partly driven by shorter lead times. The UAW strike and lower cost of raw materials (including scrap prices) also weighed on HRC prices. However, HRC prices have rebounded of late, driven by U.S. steel mills’ price hike actions and supply tightness, as well as a recovery in demand. The massive infrastructure development project should also act as a catalyst for the American steel industry and U.S. HRC prices. The sizable federal infrastructure spending should favor the U.S. steel industry, given the expected rise in consumption of the commodity. Moreover, the Inflation Reduction Act and the CHIPS and Science Act will spur demand for domestic steel in the United States.
Slowdown in China a Worry: Steel demand in China, the world’s top consumer of the commodity, has softened due to a slowdown in the country’s economy due to the protracted property crisis and weak global demand. The real estate sector has taken a hard hit amid a decline in new home prices, property investment and housing sales. Notably, real estate accounts for roughly 40% of China's steel consumption. A slowdown in manufacturing activities has led to a contraction in demand for steel in China. The manufacturing sector has taken a beating due to weaker external demand for manufactured goods and a slowdown in infrastructure spending. China has also seen a slowdown in the construction sector. The sluggishness in these key steel-consuming sectors is expected to hurt demand for steel over the short term.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #86, which places it at the top 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Steel Producers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 17.3% over this period compared with the S&P 500’s rise of 16.1% and the broader sector’s rise of 1.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 8.34X, below the S&P 500’s 13.21X and the sector’s 11.28X.
Over the past five years, the industry has traded as high as 11.85X, as low as 2.55X and at the median of 6.09X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Steel Producers Stocks to Invest in
U.S. Steel: Pennsylvania-based U.S. Steel produces and sells flat-rolled and tubular steel products. It is gaining from strong demand across its end markets, diverse order book and cost actions. U.S. Steel remains focused on executing its ongoing strategic investments. It is executing its “Best for All” strategy by expanding the mini-mill steelmaking advantage. The investment in Big River Steel is expected to be accretive to its earnings and will generate significant synergies. Cost-saving initiatives and efforts to improve operation efficiency should drive its results.
The Zacks Consensus Estimate for current-year earnings for U.S. Steel has been revised 5.4% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters at an average of 24.1%. X currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: X
Universal Stainless & Alloy Products: Pennsylvania-based Universal Stainless & Alloy Products, carrying a Zacks Rank #2, makes and markets finished and semi-finished specialty steels, including stainless steel, tool steels and other alloy steels. The company is benefiting from strengthening demand in the aerospace market, which is driving its premium alloy sales and the top line. USAP is seeing strong growth in aerospace sales as demand for new airplanes is being driven by a recovery in air travel and higher demand for business jets and freighters. The company is also gaining from a favorable product mix and higher selling prices. The completion of its capital project is expected to enable the expansion of its portfolio with technologically advanced, higher-margin products.
Universal Stainless & Alloy Products has an expected earnings growth rate of 170.3% for the current year. USAP has a trailing four-quarter earnings surprise of roughly 44.4%, on average.
Price and Consensus: USAP
Nucor: Charlotte, NC-based Nucor makes steel and steel products with operating facilities in the United States, Canada and Mexico. Nucor is expected to gain from the strength in the non-residential construction market. The company remains focused on achieving greater penetration in automotive. Nucor should also gain from considerable market opportunities from its strategic investments in its most significant growth projects. NUE remains committed to boosting production capacity, which should drive growth and strengthen its position as a low-cost producer.
Nucor carries a Zacks Rank #3 (Hold). Its earnings beat the Zacks Consensus Estimate in each of the last four quarters. NUE has a trailing four-quarter earnings surprise of roughly 11.3%, on average.
Price and Consensus: NUE
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United States Steel Corporation (X) : Free Stock Analysis Report
Nucor Corporation (NUE) : Free Stock Analysis Report
Universal Stainless & Alloy Products, Inc. (USAP) : Free Stock Analysis Report
