Record Steel Prices Create Investment Opportunities For These 4 Stocks

U.S. hot-rolled coil steel prices recently hit all-time highs of $1,300 per short ton.

Bank of America analyst Timna Tanners said Wednesday that record prices will generate huge profits for steel mills in the first half of 2021. Heading into first-quarter earnings season, Tanners said investors will be watching closely for indications from management about how steel companies will be spending their excess cash.

Excess Cash: Tanners said some companies will obviously use the near-term cash windfall to pay down debt and improve unhealthy balance sheets. However, she said companies with healthy balance sheets, such as Nucor Corporation NUE, Steel Dynamics, Inc. STLD, Reliance Steel & Aluminum Co RS and Ternium SA TX, have several options for how to allocate that extra cash.

Related Link: Gordon Johnson On 'Perfect Storm For The Steel Mills': Why He's Bullish On US Steel, Cleveland-Cliffs

One likely scenario is they will use a significant portion of it to fund working capital growth for downstream operations, Tanner said. She added that management may be hesitant to spend the cash on buybacks given the steel market appears to be at or near a cyclical peak. That same line of reasoning could discourage M&A deals in the near future given the current steel environment is a seller’s market.

“While we think M&A could heat up, aided by low interest rates and plentiful cash, we see limited options for mills and likely more downstream processing and bolt-on growth, such as NUE’s recent pipe mill or a new galvanizing or paint line, typically ~$250-300M,” Tanners said.

How To Play It: Tanners is projecting steel prices will trend “sharply lower” in the second half of 2021.

Bank of America has the following ratings and price targets for the steel stocks mentioned:

  • Nucor: Underperform rating, $56 price target.
  • Steel Dynamics: Neutral rating, price $49 target.
  • Reliance Steel: Buy rating, $167 price target.
  • Ternium: Buy rating, $44 price target.

Benzinga’s Take: All four steel stocks mentioned are up at least 45% in the past six months, so the excess cash flow Tanners is expecting in the first half of 2021 may already be priced into the stocks to a large degree.

The big question for steel stock investors is when steel prices start to pull back and how deep that pullback will be.

(Photo: Ternium)

Posted In: Bank of AmericaSteelTimna TannersAnalyst ColorPrice TargetCommoditiesReiterationTop StoriesMarketsAnalyst Ratings

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.