Jefferies Downgrades Steel Giants En Masse

Despite recent evidence that the steel market is improving, bolstered by near-term upside, Jefferies issued an industry note, broadly downgrading top steel companies.

Jefferies cited seasonal restocking, demand growth and "mounting protectionist trade barriers" as all near-term tailwinds. However, the analysts remain cautious, "[W]e fear momentum may run out of steam into summer."

"Following a strong run of equity performance for US steelmakers, valuations are increasingly hard to justify."

Downgrades

Therefore, the firm downgraded Reliance Steel & Aluminum Co RS, Commercial Metals Company CMC, Olympic Steel, Inc. ZEUS and United States Steel Corporation X to Hold for the first three and Underperform for the last, respectively.

Related Link: U.S. Metals: Balancing A Constructive Domestic Macro Environment Against China Risks

Regarding U.S. Steel, Jefferies stated, "Following a strong rally YTD, we downgrade X to Underperform as the company's stretched valuation appears hard to justify in the absence of a more meaningful price recovery than forecast […] we expect X to underperform peers as steel price momentum dissipates into summer."

Speaking toward the three downgrades to Hold, Jefferies commented, "Despite an improving steel market outlook after a deep Q4 trough, strong YTD equity performance leaves sector valuation hard to justify at 8.8x 2016 EV/EBITDA vs historical ave 6.7x." The downgrades to Hold reflect "increasingly stretched vals on both 2016 and even 2017 earnings in addition to relatively less incremental exposure to recovering flat steel prices than seen amongst peers."

Other Ratings

In addition to the four downgrades, Jefferies' note commented that the firm currently holds Steel Dynamics, Inc. STLD and Nucor Corporation NUE as top picks in the space.

"While STLD and NUE vals are lofty, we continue to see incremental upside as investors seek out higher-quality exposure to recovering prices backed by strong FCF and balance sheets," the analysts elaborated, "Further, should price momentum disappoint into summer and bring a valuation correction, STLD & NUE stand out with the most defensive risk/reward."

At Time Of Writing…

• Steel Dynamics was seen down 0.89 percent at $21.69.
• Nucor was seen down 1.71 percent at $45.90.
• Reliance Steel & Aluminum was down 2.68 percent at $68.28.
• Olympic Steel was down 2.90 percent at $16.39.
• Commercial Metals was down 4.23 percent at $16.43.
• U.S. Steel was down 5.33 percent at $14.92.