Citi Upgrades Steel Dynamics, Confident In Further Deleveraging Opportunities

Shares of Steel Dynamics, Inc. STLD surged on Thursday after the company approved a 20 percent dividend hike and Citi upgraded the stock late Thursday.

In a report issued by the firm, Steel Dynamics was upgraded to Buy, from Neutral, and the price target was raised by $1 to $21. The analysts explain that, while they had "been concerned that STLD's results and free cash generation would be negatively impacted by the drop in steel prices as well as the increased energy exposure from the acquired Columbus assets," the recent dividend hike and the call of $350 million of debt makes them more confident in the company's free cash flow generation and further deleveraging opportunities.

The analysts add, "As the US steel market finds a bottom from both a pricing and utilization rate perspective, STLD is one of the higher quality companies to invest in a potential turnaround. If we are wrong and the US steel market does not improve, the company has consistently proven that they can generate positive free cash at any point in the steel cycle, including extreme troughs such as 2010."

After updating their estimates for quarter-to-date steel and scrap prices, Citi expects EPS of $0.26 for the first quarter, down from a previous $0.29, "on lower expectations for sheet price realizations." For the full year of 2015, they project EPS of $1.58, while the 2016 forecast remains unchanged at $1.90 per share.