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Trump's Steel Tariffs Are Stronger Than The Market Expected, Says Longbow Analyst

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Trump's Steel Tariffs Are Stronger Than The Market Expected, Says Longbow Analyst
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President Donald Trump’s decision to enact a 25-percent tariff on imported steel took the market by surprise Thursday and left analysts scrambling to update their outlook for U.S. steel stocks.

The Analyst

Longbow Research analyst Chris Olin reiterated Buy ratings for the following four steel stocks and adjusted the price targets as follows: 

  • AK Steel Holding Corporation (NYSE: AKS) target unchanged at $9.
  • Nucor Corporation (NYSE: NUE) target raised from $78 to $88.
  • Steel Dynamics, Inc. (NASDAQ: STLD) target raised from $55 to $60.
  • United States Steel Corporation (NYSE: X) target raised from $50 to $63.

The Thesis

Protectionist policies were already baked into steel stock prices and earnings outlooks, but Trump’s decision to opt for a 25-percent tariff was more aggressive than the market was anticipating, Olin said in a Friday note. Despite a recent run-up in steel stocks, the latest news leaves room for further upside, the analyst said. 

“We still expect steel mills to benefit from rapid upward spot price movement throughout 2018 with a higher-than-expected floor in 2019,” Olin said. As a result, he said Wall Street earnings estimates will need to be adjusted much higher in the coming days.

Longbow is valuing U.S. steel stocks using a long-term HRC price range of between $750 and $775/ton. However, Olin expects prices to range between $850 and $875 per ton by the second quarter.

Olin made the following adjustments to his 2019 EPS projections:

  • Nucor raised from $1.75 to $7.33.
  • Steel Dynamics raised from $1.03 to $5.
  • U.S. Steel raised from $2.15 to $7.27.
  • AK Steel raised from 24 cents to $1.25.

Price Action

The prices of all four steel stocks surged between 3 and 10 percent Thursday following Trump’s announcement. The stocks are now up between 15 and 54 percent in the past three months.

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Latest Ratings for AKS

DateFirmActionFromTo
Oct 2018Seaport GlobalInitiates Coverage OnNeutral
Sep 2018Bank of AmericaUpgradesUnderperformBuy
Aug 2018Morgan StanleyUpgradesEqual-WeightOverweight

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