Pair Trade In Steel: Jefferies Upgrades Olympic, Downgrades Ryerson

• Shares of both Olympic Steel, Inc. ZEUS and Ryerson Holding Corp RYI plunged 13 percent last week.
• Jefferies’ Luke Folta upgraded Olympic to Buy, while raising the price target to $16, and downgraded Ryerson to Hold, while reducing the price target to $7.50.
• Folta believes the risk-reward is more attractive for Olympic in view of its better FCF, greater potential for margin expansion, greater upside optionality around flat rolled trade cases and cheaper valuation.

Olympic’s FCF is significantly higher than that of exceeds that of Ryerson, offering “better downside support and opportunity for deleveraging, share repo's or growth investments,” Folta said.

Olympic’s margins were substantially lower than its historical average, as well as Ryerson’s in 2014. Folta added, however, that Ryerson’s EBITDA margin premium had “begun to narrow” and is likely to continue to do so, “with carbon FR prices stabilizing and non-ferrous still on the decline.”

In the report Jefferies noted, “U.S. steel producers filed trade cases against virtually all major exporters of HRC (incl. coiled plate), CRC and coated carbon flat rolled steels to the U.S. ZEUS' 69% exposure to carbon steel flat rolled/plate offers it significant upside optionality if trade actions are successful at lifting prices (ZEUS' gross margin/t 87% cor. to flat rolled spot prices).”

Folta further added that Olympic’s shares are “far cheaper” relative to the estimated FCF generation and net tangible assets.