Emerging Market Growth, Weakening Dollar a Boon for Harsco

Harsco (HSC) looks like the best steel play as the US dollar weakens and emerging markets stimulate economies

Harsco is a specialized global leader of industrial services and products (mainly steel and other minerals) that has a large presence in non-commercial and government spending projects for railways, energy infrastructure, and transportation infrastructure. This will make the company less susceptible to the weakness in residential construction, and will benefit the company as the stimulus plan goes into effect.

Harsco trades 9.4x forward earnings, 0.6x sales, and 1.46x book value (which is expensive in the peer group). Harsco has forecasted less of a negative impact to earnings for next year, compared to fellow steel companies.

Harsco sales are broken down as follows: 40% in infrastructure, 25% in metals, and 35% in minerals, rail, and industrial. Western Europe accounts for 58% of infrastructure revenues, while North America accounts for 87% of mineral, rail, and industrial revenues. Harsco is targeting a niche market, emerging markets, where growth should fuel the demand for the company’s products for years to come.

Also, Harsco revenues are operating at high renewal rates and most are under very long term contracts. Harsco is estimating more than $5bln in backlogs for 2009, with about $1bln in new business, $0.5bln in renewals, and $4bln in existing business. Recent restructuring announcements should improve 2009 margins, especially selling value to customers in environmental recycling, and higher technology offerings.

The recent decline in the US dollar will also benefit Harsco. Harsco also continues to deleverage, aiming for a debt to capital ratio of 39.6% in 2009, down from 45.3% in 2008. When looking at the breakdown of 2009 EPS forecasts ($3.20 to $3.30), there looks to be a good chance of better than expected results due to lower fuel costs, a weaker dollar, and reorganization measures taken.

On the charts, Harsco is looking strong after breaking out of the $17 to $25 channel, an implied move to $33 is underway, as shares consolidate here and have support at the converging 20 and 50 day EMAs, on declining volume.

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Disclosure: no positions