KeyBanc Issues Stronger Forecast For 3 Steel Names

The steel sector is looking more attractive than in the past, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Philip Gibbs:

Upgraded Timkensteel Corp TMST's from Underweight to Sector Weight with no assigned price target, but a $16 "fair value" price.

Maintains an Overweight rating on Reliance Steel & Aluminum Co RS with a price target boosted from $84 to $95.

Maintains an Overweight rating on Steel Dynamics, Inc. STLD's stock with a price target boosted form $44 to $49.

The Thesis

U.S. steel demand in 2017 was forecast to have initially grown by 2 percent, but a more accurate figure is 5 percent, Gibbs said in an industrywide research report. (See the analyst's track record here.) 

Growth came from stronger energy and industrial demand and some implied restocking, Gibbs said. Toward the end of 2017, fourth-quarter shipments were likely stronger than distributors expected, while December shipments were "much better than normal seasonality," he said. 

Given the strong momentum, KeyBanc lifted his 2018 HRC pricing estimate from $615/ton to $655/ton (versus 2017's $623/ton) with strength coming from the energy and industrial sectors, plus alignment in auto inventories, the analyst said.

Related Link: This Big US Steel Bear Admits Opportunity For Near-Term Upside

TimkenSteel's Upgrade

SBQ, or special bar quality, steel represents around 60-65 percent of TimkenSteel's consolidated business and up to 80 percent of its value-added business, Gibbs said. Expectations for 2018 are that the annual SBQ contract price resets will boost the company's FIFO EBITDA from a prior estimate of $93 million to $117 million, he said. 

TimkenSteel will also see less impact year-over-year from a raw material spread hit and improvements in energy shipments with further upside to the company's annually priced billet arrangement, Gibbs said. 

Reliance Steel & Aluminum's New Demand Baseline

Gibbs turned incrementally bullish on Reliance Steel & Aluminum due to higher than previously expected volumes in the fourth quarter, which he said creates a new demand baseline for 2018. The company will benefit from higher carbon and aluminum pricing expectations and an 80-cents-per-share benefit from tax reform.

Incrementally Bullish On Steel Dynamics

Gibbs' 2018 earnings per share estimate for Steel Dynamics moved higher from $2.67 to $3.50 due to higher sheet volumes and spreads along with stronger beam spreads, he said. The analyst's revision doesn't assume normalization in CRC-to-HRC spreads.

At around $46 per share, Steel Dynamics' stock trades at an 8x EV/EBITDA valuation on 2018 estimates, in the middle of the stock's historic normalized range of 6x to 9x, the analyst said. A $49 price target implies an 8.5x multiple, which is justified given the company's industry growth momentum and strong recurring FCFE yield of around 8 percent, he said. 

Related Link:

AK Steel Upgraded On Expectations Of Higher Steel Prices