Morgan Stanley Sees Upside For Steel Dynamics As Margins Expand

Morgan Stanley reiterated its Overweight rating and $28 price target on Steel Dynamics, Inc. STLD in a research note issued Wednesday.

Analyst Evan L. Kurtz noted that “Investors are concerned about steel prices given cost deflation and imports. However, margins matter more and we forecast EAF metal margin expansion given favorable structural trends. STLD stands to directly benefit, and with a good tactical setup.”

“While foreign producers can export deflation to the US via steel, we believe structural industry improvements (consolidation, logistics constraints, trade barriers, and favorable demand trends) will mitigate downward pressure on domestic prices,” according to Kurtz.

“We now expect $615/t HRC in 2015 with a metal margin of $295/t vs. $660/t HRC and a $265/t margin in 2014. As a result, our 2015 Steel Dynamics EPS estimate rises to $2.50, well above consensus of $2.20, implying a reasonable 11x P/E on our $28 price target.”

Kurtz felt that “despite the recent expansion in metal margins as the decline in scrap prices outpaced the fall in steel prices, Steel Dynamics shares have remained range-bound. We see upside as consensus begins to incorporate lower scrap costs. The current share price offers an attractive entry point ahead of the seasonally strongest period of the year (January to April).”

Kurtz concluded that “Steel Dynamics will continue to benefit from several positive structural industry changes, including: 1) Consolidation among flat-rolled producers; 2) Logistics delays affecting rail, truck, and barge availability and pricing, which help protect the Midwest market from imports; 3) Supportive trade policy, including the potential for additional trade cases; and 4) Favorable underlying demand trends (onshoring, autos, non-res).”

Steel Dynamics, Inc. closed at $21.90 Tuesday, down 0.5 percent.