KeyBanc Projects 17% Upside In Timkensteel Corp. Shares

Timkensteel Corp TMST shares have pulled back about 26 percent since their Jan. 23 high, in contrast to a more modest 8-percent drop by the S&P 500 Index, prompting KeyBanc Capital Markets to upgrade the stock.

The Analyst

Analyst Philip Gibbs upgraded shares of Timkensteel from Sector Weight from Overweight with a $17 price target, suggesting about 17-percent upside from current levels.

The Thesis

An attractive valuation after the recent sell-off, modest incremental improvement in industry spot pricing and the emergence of a stronger free cash flow estimate were the drivers of the upgrade, Gibbs said in a Sunday note.

The firm's 2018 HRC pricing estimate is now up from $655 per ton to $670 per ton, while the CRC view is maintained at $825 per ton, lowering the HRC-to-CRC spread to $155 per ton compared to $190 per ton in 2017, according to KeyBanc. The spread is now easing closer to the trailing 10-year average of $120 per ton, Gibbs said.

The normalization is a function of positive HRC standard deviation and less relative tightness in downstream products amid new capacity and import persistence, the analyst said.

"We believe spot HRC mill spreads will grow strongly in 2018, while downstream products will be more muted," Gibbs said.

KeyBanc modestly increased its estimates for Timkensteel, citing an improving U.S. SBQ, or special bar quality, pricing and mix backdrop.

The firm sees Timkensteel and Steel Dynamics, Inc. STLD to be more affected relative to Nucor Corporation NUE and Commercial Metals Company CMC if the Trump administration's infrastructure narrative becomes dragged or disappoints, Gibbs said.