Heavy Metal: Goldman Downgrades Kaiser Aluminum, Upgrades Commercial Metals

Goldman Sachs zeroed in on the metals and mining space this week after companies in the sector reported quarterly earnings. 

The Analyst

Analyst Matthew Korn downgraded Kaiser Aluminum Corp. KALU from Neutral to Sell and reduced the 12-month price target from $105 to $101.

The analyst upgraded Commercial Metals Company CMC from Sell to Neutral and maintained a 12-month price target of $24.

Anticipated EBITDA Improvement Inadequate To Support Multiple

After flattish performance over a three-year period, Kaiser is poised to post strong EBITDA growth of 11 percent into 2019, supported by a moderation in aluminium costs, Korn said in a Monday note. (See the analyst's track record here.) 

Kaiser's EV/EBITDA multiple has expanded to 8.9 times Goldman's 2019 forecast, notably above its five-year average of 7.2 times.

The strong EBITDA expectations are not enough to support a multiple at the high end of the firm's downstream group, Korn said. 

The company's A&D markets continue to face headwinds, and growth in the automotive end market is coming mainly from low-margin products, the analyst said, adding that he does not see opportunity for explicit organic capacity and capability expansions.

"We see better value in stocks such as Buy-rated Constellium NV CSTM, where we view the prospects for volume growth and margin expansion as solid, backed up by several quarters of exceeded expectations at an attractive valuation." 

Commercial Metals Appears Reasonably Valued

Despite a not-so-positive sentiment toward steel stocks, the risk-adjusted reward for Commercial Metals still appears attractive, according to Goldman Sachs. 

This is due to the shares trading below their mean historical EV/FY2 EBITDA multiple, Korn said. 

"We see the potential for upside to our estimates as rebar prices remain elevated and the U.S. rebar market is poised to become more consolidated," the analyst said. 

Tariffs imposed on Turkish steel and aluminum are impacting Turkey's ability to send steel to the U.S., offering Commercial Metals protection for its key product, according to Goldman Sachs. 

The Price Action

Kaiser shares were slipping 1.21 percent to $108.36 at the time of publication Tuesday, while Commercial Metals was gaining 1.74 percent to $22.18. 

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