Earnings Catalysts, M&A Opportunities Earn Steel Dynamics An Upgrade

Earnings and M&A catalysts have added sheen to Steel Dynamics, Inc. STLD shares. Citing these two catalysts, KeyBanc Capital Markets upgraded shares of Steel Dynamics and raised its earnings per share estimates for the company.

As such, the firm upgraded shares of Steel Dynamics from Sector Weight to Overweight with a $44 price target.

After adding 3.68 percent to $37.78 on Thursday, Steel Dynamics was up an incremental 1.96 percent at $38.52 in pre-market trading.

Analysts Philip Gibbs and Tyler Kenyon said they are raising their earnings per share estimates for the period from 2017 to 2018, attributing the revision to better third-quarter cost performance, better appreciation of timing/magnitude of organic growth initiatives and completed share repurchase activity.

The analysts raised their 2018 earnings per share estimate from $2.35 to $2.70. The analysts believe execution and organic growth levers are now enough to more than offset steel-marking consumable cost increases. Gibbs and Kenyon expect fuller realization of long products internal growth initiatives to add another 15 to 25 cents per share.

KeyBanc Capital Markets said it thinks the time is ripe for some meaningful, perhaps transformational M&A, with forward net debt-to-EBITDA, financed partly with cash and partly with debt. This, according to the firm, will lead to over 35 cents in earnings per share accretion.

All else equal, the firm said M&A prospects give an aspirational 2019 earnings per share power of $3.25 to $3.50, supporting a share price near $50.

On valuation, the firm said the shares appear reasonably valued at current levels, on a relative basis. The firm noted that the stock now trades at a discount to the carbon steel sector despite an industry-leading return on invested capital. The firm also said the U.S. sheet pricing recovery supports more constructive sector sentiment.

At time of publication, shares of Steel Dynamics were up 2.12 percent at $38.58 in Friday's pre-market session.