Jefferies Shows Concern Related To Steel Sector In Q3 And Beyond

• Luke Folta of Jefferies stated in a note that headwinds facing the steel sector is "stronger now than at any other time since the 2009 global downturn."
• Reduction in metal pricing and a lower than previously expected overall demand resulted in a 12 percent reduction to earnings forecasts and corresponding price target objectives.
• Companies with the "highest/most defensible" margins can still offer investors "good value."

In a report published Wednesday, Jefferies analyst Luke Folta revised his steel estimates lower, reflecting "weaker" U.S. demand trends and a "darkened" outlook for global steel prices due to a slowing Chinese demand and strong U.S. dollar.

Folta's bearish stance stems from his third quarter steel survey which suggested steel demand continues to trend lower versus expectations and a recovery in steel prices is "unlikely" to occur in 2015. The analyst added that diminished demand is also attributed to a "severe" pullback in oil and gas along with "incremental weakness" in key industries including mining and agriculture.

Folta said 52 percent of industry contacts he surveyed reported a weaker steel demand quarter over quarter while 39 percent anticipate a seasonally weaker fourth quarter. Meanwhile, prices for HRC (hot-rolled coil) saw "renewed weakness" to $450/t as of mid-September, although recent deals were reportedly as low as $420/t with 29 percent of contacts are expecting further incremental weakness. As such, the analyst revised his 2015 HRC price target lower by $27/t to $464 and slashed his 2016 estimates by $47/t to $476.

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Value Still To Be Found In Stocks

Folta stated that it has been his "core thesis for some time" to favor steel companies that lead the industry in terms of : 1) margins and free cash flow generation, 2) favorable low/variable cost structure, 3) high value product offering and lack of outsized cash requirements (i.e pension, capex, etc), 4) ability to enable growth through investments. In addition, companies with "above average" exposure to the U.S. non-residential construction market is also a "favorable attribute." The analyst added that Steel Dynamics, Inc. STLD, Reliance Steel & Aluminum Co RS, Commercial Metals Company CMC and Nucor Corporation NUE are companies that satisfy his criteria and offer "good value."

Price Target And Ratings

• Shares of A.M. Castle & Co CAS are Hold rated with a $2.50 price target.
• Shares of AK Steel Holding Corporation (NYSE AKS) are Hold rated with a $3 price target.
• Shares of Commercial Metals Co. are Buy rated with a $20 price target.
• Shares of Nucor are Buy rated with a $52 price target.
• Shares of Olympic Steel, Inc. ZEUS are Buy rated with a $16 price target.
• Shares of Reliance Steel & Aluminum are Buy rated with a $72 price target.
• Shares of Ryerson Holding Corp RYI are Hold rated with a $6.75 price target.
• Shares of Steel Dynamics are Buy rated with a $25 price target.
• Shares of Timkensteel Corp TMST are Buy rated with a $20 price target.
• Shares of United States Steel Corporation X are Hold rated with a $15 price target.