Could Steel Be A Steal?
Sparrows Point in Baltimore County, Maryland, once housed the world's largest steel mill. However, times have changed, and just recently RG Steel announced that it would be laying off over 700 employees at its Sparrows Point plant.
RG Steel, a private company, bought the plant last spring as part of a deal that cost the company $1.2 billion. GE Capital, a division of General Electric (NYSE: GE), loaned RG Steel $750 million to help complete the deal. The recent layoffs were precipitated by internal changes within GE Capital designed to boost the financial services company's reserves, which has had severe negative effects on RG Steel's liquidity.
The news of the layoffs sent shock waves throughout the steel industry. No one is sure exactly how this will affect sheet supply in the U.S. in the near-term future. That said, the U.S. steel market has been suffering from excess sheet supplies for some time. Bank of America and others have noted that RG Steel's troubles could be a boon for other steel companies.
Below are four companies that could benefit from the partial shut down of RG Steel's Sparrows Point plant, most of which were hit quite hard earlier in the year:
1. AK Steel Holding Corporation (NYSE: AKS) Market Cap: $910.87 million P/E: -
AK Steel is a midwest-based company that produces electrical and stainless steels, including steel for automakers. The company's stock is down almost 50% year-to-date, but it appears that it may be poised for a rebound. Just recently, AK Steel announced a $50 per ton price increase for carbon steel products. However, if the company's stock does see a dramatic rise, this would hurt the shares' yields, which are currently attractive at 2.42%.
2. United States Steel Corporation (NYSE: X) Market Cap: $3.81 billion P/E: -
United States Steel is one of the world's top steel companies, and is capable of producing over 30 million net tons of raw steel annually. Like AK Steel, United States Steel is down over 50% year-to-date. That said, the company's stock has been on the rise over the last couple of months, a general trend in the steel market. Strong car sales would help the company.
3. Steel Dynamics, Inc. (NASDAQ: STLD) Market Cap: $2.88 billion P/E: 11.68
Steel Dynamics is both a steel producer and metal recycler. The company announced its expected fourth quarter earnings this month, pegging earnings at $0.08 to $0.12 a share. That's higher than last year's fourth quarters earning, but lower than their third quarter 2011 earnings. The company also declared a $0.10 dividend per common share. The stock closed Friday at $13.15, and has a $20.70 52 week high.
4. Nucor Corporation (NYSE: NUE) Market Cap: $12.53 billion P/E: 20.01
Nucor Corporation produces steel and steel products, and is heavily involved in the manufacturing of sheet steel. The company shares are down only 9.7% year-to-date, which is a significantly stronger performance than the other companies in this list. While this is a positive, it suggests that the company may not have as much potential as a buy low “steal” as the other companies mentioned. However, it's as poised as any other steel company to benefit from RG Steel's troubles.
Traders who believe that news on RG Steel will improve inventory turnover in the steel industry may want to consider the following:
- Go long on the aforementioned companies via shares or call options.
- Buy into Market Vectors Steel Index ETF (SLX), or perhaps PowerShares Global Steel Portfolio (PSTL) for traders that believe the news will have broader global implications.
Traders who believe that the news on RG Steel won't improve inventory turnover in the steel industry might consider the following:
- Short the companies listed above, which may be a good play if demand for steel is low.
- Short Market Vectors Steel Index ETF and other steel ETFs, or pursue options strategies to hedge current investment.
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