Credit Suisse Upgrades Steel Stocks On Increasing U.S. Steel Price

“We remain very bullish on the US steel industry,” Credit Suisse’s Curt Woodworth said in a report, while significantly raising the spot and contract price deck. The analyst expects the US flat rolled market to continue to tighten over the next several months.

Analyst Curt Woodworth said that investors seem to be underestimating structural change in the US sheet market. He named the top picks as AK Steel Holding Corporation AKS, United States Steel Corporation X and Steel Dynamics, Inc. STLD.

AK Steel

Woodworth upgraded the rating for AK Steel from Underperform to Outperform, saying that the company had underappreciated spot leverage and was poised to benefit significantly from stronger contract prices in 2017. The price target has been raised from $3.50 to $7, reflecting higher EBITDA and FCF estimates.

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Previous concerns related to liquidity had been alleviated following the company’s recent equity offering. The analyst believes AK Steel is in a “strong position to de-lever the balance sheet over the next several years and selectively repurchase longer dated debt at a discount to par value.” He forecasted significant FCF generation over the next several years.

US Steel

Woodworth maintained an Outperform rating for US Steel, while raising the price target from $22 to $26. He expects the company to be able to “recapture most of the contract ASP headwind from 2016.”

The analyst raised the 2016 and 2017 EBITDA estimates to $640mm and $1.2bn, respectively, reflecting the revised price deck, higher 2017 contract prices, and improved conversion cost metrics associated with higher utilization rate expectations. The FCF forecasts are at $281mm and $387mm, respectively.

Steel Dynamics

Credit Suisse maintained an Outperform rating for Steel Dynamics, while raising the price target from $27 to $33. “In our view, STLD has compelling upside over the medium term as the company continues to expand capacity and upgrade product mix within the US value add sheet market,” Woodworth wrote.

Metal spreads for US flat rolled products are likely to remain above mid-cycle levels through 2018, while a significant jump in volumes for both sheet and long products is likely to result in a strong improvement in conversion cost metrics.

The EBITDA estimate for 2016 and 2017 have been raised to $1.4 billion and $1.7 billion, respectively. “Importantly, STLD has compelling future organic and inorganic growth potential and we expect STLD to announce incremental projects to fully utilize spare hot metal capacity across its steel facility base,” the analyst added.

Nucor

Woodworth maintained a Neutral rating for Nucor Corporation NUE, while raising the price target from $45 to $55. He commented, “While we recognize that EBITDA growth in 2016 might be underappreciated, NUE's lower exposure to the healthiest steel products in the near term makes this a less compelling story in the space in our view.”