Analysts at KeyBanc: M&A And Potential Trade Cases Strengthen Certain Steel Companies

According to analysts at KeyBanc, there exists a solid stream of macro-economic and other data sects which indicates there exists a demand recovery in the steel market. Naturally, this bodes well for the risk-reward characteristics in shares of

and

The analysts, Philip Gibbs and Tyler Kenyon point out that stable auto sales data, PMI, ABI and rig count all confirm the steel industry is on track to achieve a three percent to five percent consumption growth rate by the end of 2014.

According to the analysts, investors could expect further consolidation in M&A activity over near-term. In addition, the notion of “leveling the playing field” through trade restrictions is becoming more likely. “We expect a series of trade cases to be filed over the next six to twelve months, targeted at carbon sheet and plate products arenas,” the analysts wrote. “While trade case fillings may not ultimately stifle the volumes of steel coming into the United States, we believe, at a minimum, this will help solidify the pricing floor across sheet and plate products.” The analysts note that M&A Activity and trade cases may “defray” some investor concerns related to industry pricing power and the higher domestic steel prices compared to foreign competitors. The analysts are raising their 2014 and 2015 sheet pricing assumptions based on a tighter U.S. supply-demand balance. The analysts are projecting a cost of $669 per ton for U.S. Hot Rolled Coil in 2014 which will slightly decline to $645 per ton in 2015, which is in-line with the current NYMEX futures curve.

Gibbs and Kenyon established a $48 price target on shares of United States Steel, representing over 45 percent upside from current share prices. At the same time, the analysts upgraded shares to Buy from Hold. The analysts previously held bearish views based on an OCTG trade case ruling in mid-February. Additionally, an “escalating malaise” in the commodities environment existed along with a general concern that an iron ore pricing correction has the potential to drive U.S. sheet pricing lower. These negative sentiments have abated in recent months given a more positive OCTG trade case final determination and a perception that the iron ore correct has run its course. Looking forward, the analysts express a bullish sentiment which exceeds the Street's current expectation. The reasons include the potential for further productivity savings announcements, growth initiatives and potential higher interest rates which could create additional positive catalysts. The analysts are expecting United States Steel to report a third quarter earnings per share estimate of $1.19, noticeably higher than the Street's estimate of $0.73. In fiscal 2015 the analysts are projecting a full year earnings per share of $4.00, also noticeably higher than the Street's estimate of $2.29.

Gibbs and Kenyon established a $28 price target on shares of Steel Dynamics, representing over 30 percent upside from current share prices. At the same time, the analysts upgraded shares to Buy from Hold. The analysts believe that Steel Dynamics offer investors an under-appreciated story given the likelihood of “upside surprises” from its acquisition of Severstal's Columbus facility. In addition, investors are perhaps also under-appreciating Steel Dynamic's improving sheet metal spreads, operational progress at Mesabi Nugget and a “sizable” pro forma free cash flow in 2015 of over $600.

Gibbs and Kenyon maintained a Hold rating on

with no assigned price target. Gibbs and Kenyon maintained a Buy rating on

with an unchanged $58 price target.