Morgan Stanley Names U.S. Steel, Steel Dynamics As Top Picks
Viewing the steel industry as "Attractive," the bank increased its price targets by nearly 40 percent and notes U.S. Steel and Steel Dynamics as its top picks. U.S. Steel is rated Overweight and its price target was hiked from $35 to $60. Steel Dynamics is rated Overweight with a price target increase from $21 to $28.
The main drivers for the firm's view are:
- Further consolidation (which will correct poor pricing patterns and import order patterns)
- A return to capacity utilization to the 80 percent plus range
- New import duties and potential for further cases
- Improving underlying demand
- A structural increase in service center inventories
Analyst Evan Kurtz sums his views on the two steel producers:
"In addition to high fixed cost leverage, US Steel’s new management team has been successfully cutting costs. The company may also find a way to walk away from their loss-making operation in Canada in our bull case. Steel Dynamics, a well run, low-cost producer, is a safer way to play a recovery. We see upside from under-appreciated profits at Columbus and the shutdown or fix of Mesabi."
The steel industry is streamlining itself as demand improves, capacity closures help chop of wasteful plants and restrained supply growth are "finally working together to push capacity utilization to the 80 percent mark."
The firm continued:
"We believe that once utilization reaches into the 80%+ range (which has just occurred on a weekly basis), mills will see enhanced pricing power and profitability. Several factors contribute to this dynamic. First, higher utilization means less unused capacity chasing business. Second, higher output means greater fixed cost absorption, particularly for blast furnace operators."
Shares of U.S. Steel opened up 3.1 percent higher, while Steel Dynamics was up 2.5 percent.
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