The Worst Is Behind Schnitzer Steel, Morgan Stanley Upgrades

• The share price of Schnitzer Steel Industries, Inc. SCHN has declined 36.4 percent year to date, from $22.56 on December 31, 2014.
• Morgan Stanley’s Evan L. Kurt has upgraded the rating on the company from Underweight to Equal-weight, while raising the price target from $14 to $21.
• With the company delivering better than anticipated underlying cash margins during the peak scrap weakness in 2015 and given the 46 percent upside to the share price, Kurt has upgraded the rating.

Analyst Evan Kurt expressed optimism regarding the company’s mid-cycle margins, while expecting robust free cash flow yield.

“We think consensus is looking at $25-27/t margins for FY2016, and giving only a small credit for recent cost savings,” Kurt said.

Kurt also believes that the worst is over for Schnitzer Steel, given that the stock has underperformed its peers by about 50 percent over the last five years. However, the company has demonstrated its ability to manage costs and generate cash, which is expected to provide downside support.

In addition, Kurt believes that the risk-reward is balanced at present, although “some structural challenges remain.”

“We cannot get more constructive on the name as long as the global steel market remains grossly oversupplied,” Kurt mentioning, adding, “We are closely watching current headwinds, such as falling iron ore/scrap and surging Chinese exports for sign of sustainable improvements.”