Jefferies Upgrades Schnitzer Steel Industries, 'Scrap Headwinds Remain'

Jefferies upgraded Schnitzer Steel Industries, Inc. SCHN from Underperform to Hold and maintained a $20 price target.

Analyst Luke Folta noted that “while declining scrap prices will likely remain a headwind throughout 2015, we believe margins in its core MRB and APB business are nearing a trough and see its relatively favorable FCF (10 percent) and dividend yield (3.8 percent) offering downside support.”

At the current low capex levels of approximately $40 million for FY 2015, “which management says are sustainable LT if needed, it has ample FCF to fund its dividend going forward (a dividend cut is required to drive material downside from here, in our view).”

Folta expected “the impact of excess shredder capacity to persist, which continues to drive up recycler buy prices and pressure spreads.”

Folta also believed that “recycler metal spreads are nearing cycle trough levels” and “that once price headwinds subside some improvement in margins will likely occur as benefits of the company's numerous cost cutting initiatives ($54M announced to date) become more evident.”

Schnitzer Steel Industries, Inc. recently traded at $18.62, down 6.62 percent.