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

U.S. Metals: Balancing A Constructive Domestic Macro Environment Against China Risks
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In their US Metals & Mining Industry report, Credit Suisse’s Curt Woodworth mentioned that the US macro outlook remained “supportive,” with strong medium-term growth potential in both automotive and non-residential construction.

Apart from China macro risks, the market has grown increasingly concerned about US demand trends, after the significant volume weakness witnessed in the back half of 2015 and softer micro data-points across energy, industrial and commercial construction markets.

Analyst Curt Woodworth expects a strong rebound in US demand, backed by required restocking as well as strength in automotive and a marginal improvement in commercial construction.

US Steel: Strong Outlook For Volume And Pricing

Woodworth initiated coverage of the US Steel Sector with a bullish stance. He mentioned that the US market seemed close to a cyclical low point in terms of volume and pricing, and both may increase significantly through the rest of 2016.

The analyst initiated coverage of Steel Dynamics, Inc. (NASDAQ: STLD) with an Outperform rating and a price target of $25. Woodworth mentioned that the company was the lowest cost flat rolled producer in the US, and had highest earnings leverage to a flat rolled market recovery.

Credit Suisse initiated coverage of United States Steel Corporation (NYSE: X) with an Outperform rating and a price target of $19. Woodworth expects the company to achieve margin expansion with a recovery in volumes. States Steel may outperform expectations for FCF and EBITDA in 2016.

Commercial Metals Company (NYSE: CMC) has been initiated with a Neutral rating and a price target of $16. The analyst cited downside risk to both merchant bar and rebar metal margins over the next few quarters as reason for the cautious stance.

Woodworth initiated coverage of Nucor Corporation (NYSE: NUE) with a Neutral rating and a price target of $42. Nucor’s sheet exposure is only 40 percent of volume. The analyst added, however, that the company is poised for strong growth in mid-2016, although plate markets continued to be weak and there was significant import pressure in rebar and MBQ.

Credit Suisse initiated coverage of AK Steel Holding Corporation (NYSE: AKS) with an Underperform Rating and a price target of $2. Woodworth said that AK Steel may struggle for the next several years due to structural challenges for US integrated producers as well as the company’s sizeable debt and legacy liabilities. Moreover, AK Steel has a high fixed cost base and Ashland could remain idle through at least Q216.

Iron-Ore: Hold Your Breath

While mentioning that iron prices were up 66 percent off their 2015 bottom, Woodworth mentioned that Credit Suisse's Commodities team was bearish on the medium-term iron-ore fundamentals.

The price estimate for 2H16 is $35/tonne, “as Chinese demand remains structurally weak and a new wave of supply enters the market.” The analyst added that volume trends in the US remain bearish on account of significant structural challenges facing integrated producers.

Woodworth initiated coverage of Cliffs Natural Resources Inc (NYSE: CLF) with an Underperform rating and a price target of $1. He believes there is significant downside on balance sheet and valuation concerns.

Cliffs’ shares are up 63 percent year-to-date, versus a 2 percent decline in the S&P500. The outperformance has been driven by iron ore seasonality, rather than company-specific factors, Woodworth commented. He added that while the company may have enough liquidity over the next 18-24 months, its liquidity position is likely to tighten significantly in 1Q17 and it may face a liquidity crunch in 2018.

US Aluminum Sector

Credit Suisse initiated coverage of the US Aluminum Sector with a bullish view on downstream markets and a cautiously optimistic view on upstream markets.

“We believe upstream markets have bottomed owing to aggressive supply side curtailments and sharp declines in Chinese supply growth,” Woodworth wrote.

The coverage of Alcoa Inc (NYSE: AA) has been initiated with an Outperform rating and a price target of $13. The stock is significantly undervalued based on SOTP analysis, the analyst mentioned. Alcoa has plans to split into 2 separate companies in 2H16. As primary aluminum recovers, there could be upside to the price target.

Woodworth initiated coverage of Constellium NV (NYSE: CSTM) with an Outperform rating and a price target of $10. The analyst named this stock as the top idea in the aluminum sector, citing its depressed valuation and positive near-term catalysts. He added, “We expect CSTM to de-risk the Wise acquisition by creating a JV for future BiW growth and reducing capex via increased merchant / in-house supply.”

Credit Suisse initiated coverage of Kaiser Aluminum Corp. (NASDAQ: KALU) with a Neutral rating, and a price target of $85. Woodworth termed the stock as a defensive play, citing the company’s favorable macro exposure to aerospace / automotive light weighting as well as best-in-class ROIC and FCF generation. The rating reflects the stock’s rich valuation.

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