Steel Shares Take a Tumble in January

by: Michelle Galanter Applebaum

The Steel Company Value Monitor is a monthly review focused on steel company stock performance and valuation. In this report we examine 16 different valuation and performance metrics for 40 steel and steel-related stocks. steel,

Steel Stocks Lose Footing in January. Steel and steel-related stocks underperformed the market in January, with 28 stocks underperforming the S&P 500’s 4.6% decline and only 12 stocks outperforming the market. After a 9.6% advance in December, the S&P Steel Supercomposite index dropped 12.4% in January, as early gains driven by upside earnings surprises reported by WOR and SCHN were reversed as less than stellar reports started to come in. In what was in our view a serious market misfire, AKS shares ended the month up some 0.7% despite a seeming 4Q earnings beat that included a non-period LIFO gain that would otherwise have missed the mark by some 60%.

Other Earnings Reactions Confused. We were equally surprised by the reaction to NUE, which reported roughly double consensus with an $0.11 “clean” quarter (normalizing the tax rate) while the company gave the single most bullish outlook they’d had in the past 18 months by saying “margins have a good chance of being healthier” in the first quarter. That comment from this management was almost as good as a dividend increase – oh wait, they did that last month too; still the shares dropped some 7.6% by month-end. US Steel (NYSE:X) took a meaningful post-earnings drubbing, down some 21% despite in-line earnings because guidance (which was spot on with our 1Q forecast) was far worse than ridiculously overly optimistic Street consensus for the first quarter. In our view the company performed very well in the quarter, but the Street may not understand that blast furnaces don’t turn on and off in an instant and the current market volatility is expensive to deal with.

All Sub-Indices Fall in January. Every sub-index fell this month, with the two strongest performers in our coverage universe for the second consecutive month were the pipe & tube index, declining only 3.1% followed by the specialty steelmaker index which fell 4.7%. Our blast furnace steelmaker index fell 5.7% in the month, adjusting for Severstal – which rose 40% on announced facility restarts - the blast furnace index would have been down some 12.2%. The metals service center and raw material provider indices declined 6.8% and 11.0%, respectively, while our minimill index plummeted 12.5%.

Outlook. We are seeing improving fundamentals as surging demand in China, higher raw materials prices, and low inventories globally drive steel prices higher. The remainder of fourth quarter earnings should contain very little good news but we’re ready for a somewhat improved 2010.

Disclosure: N/A