Steel valuation multiples would likely compress further in the near term, until pricing bottoms out, Jefferies’ Seth Rosenfeld said in a report.
Although the rise in steel prices would result in solid Q3 earnings and guidance, steel shares could remain under pressure due to “the recent inflection in steel pricing and bearish survey outlook,” the analyst commented.
Rosenfeld expects the derating of steel valuations to persist through the second half of 2016.
Recovery Likely In 2017
U.S. steel prices have been following a downward trajectory through Q3 due to lower raw material input costs, higher flat rolled imports and a seasonally weak demand environment. Rosenfeld expects the downturn to continue through yearend due to “incremental weakness in raw material input costs as well as supply-side pressures from ramping capacity.”
A revised analysis of the flat rolled market indicates opportunity for producers to regain pricing power in the first half of 2017.
Top Picks
The analyst named Steel Dynamics, Inc. STLD and Nucor Corporation NUE has the top and most defensive picks. He maintained Buy ratings on both stocks, although reducing their price targets from $31 to $28 for Steel Dynamics and from $60 to $55 for Nucor.
The companies have lower cost operating structures and less levered balance sheets.
“We concede shares will likely remain pressured near term, but expect better relative performance and ultimately absolute upside when pricing stabilizes,” Rosenfeld wrote.
Worst Affected
The analyst stated that integrated mills United States Steel Corporation X and AK Steel Holding Corporation AKS were highly sensitive to absolute steel prices and faced margin risk from surging coking coal prices. Thus, these stocks would likely “face the brunt of the downside pressure.”
Jefferies maintained Hold ratings on the companies, while reducing the price targets for US Steel from $24.50 to $18 and for AK Steel from $5.50 to $4.50.
Other Ratings
Rosenfeld maintained Hold ratings for these stocks, with the following price targets:
- Commercial Metals Company CMC – Maintained at $16.50
- Olympic Steel, Inc. ZEUS – Lowered from $25 to $20
- Reliance Steel & Aluminum Co RS - Maintained at $72
- Ryerson Holding Corp RYI – Cut from $14.50 to $12
- Timkensteel Corp TMST – Lowered from $11 to $9.75
- Worthington Industries, Inc. WOR - Maintained at $37
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