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.
- Summary and Outlook. The S&P Steel Supercomposite Index more than doubled the market’s performance in December, gaining nearly 15% versus the market’s 6.5% increase, as we saw an unprecedented five sheet price hikes in the month along with multiple hikes for long products, as domestic buyers came back into the market in concert. We believe global steel prices may extend the recent upward run into the second quarter on higher raw material prices - most notably met coal - which is likely to jump from the rain-driven disruptions of production and shipping in Queensland, Australia. In the US, we believe that these near-vertical price increases make sense – to the extent that any pricing trend in the industry has proven to be temporary, so the logic of the mills “making hay while the sun shines” is impeccable. Justifying these price increases as cost-driven in an environment of zero profits should not be a consideration – in our view – unless of course the concept of steel companies subsidizing steel consumers has become part of our brave new world.
- Most Steel Stocks Outperform Market in December, Split for the Year. Some 33 of the 40 stocks we monitor outperformed the market in the month, with just two stocks recording a decline. Fourteen stocks posted increases of over 10%, while eight rose more than 20% and three saw gains in excess of 30%. With the strong December showing, the S&P Steel Supercomposite Index ended the year outperforming the market, rising 13% versus the S&P 500’s 12.8%, with 20 companies outperforming the market and 19 underperforming. For the first 11 months, the group was actually down 1.7% versus the market’s 5.9% ascent.
- All Sectors Post Gains, Service Centers Strongest. Our metals service center index rose 18.8% in the month, paced by increases of 36.3%, 33.2% and 21.6% in shares of Olympic Steel (ZEUS), Gibraltar Industries Inc. (ROCK) and A.M. Castle (CAS), all of whom fit our model as potential acquisition targets. Buoying Olympic, most probably was also its large exposure to flat-rolled sheet product prices – which rose sharply during the month – and its ability under FIFO to report the benefit of passing on spot price increases in real time to customers before the impact of higher-cost steel hits the bottom line as in LIFO. Our raw materials provider index increased 16.1% in December, as shares of Metalico Inc. (MEA) and Sims Metal Management (SGM) soared 34.6% and 29.2%, respectively, driven by sharp increases in scrap prices in the US and abroad in the month of 12% and further increases expected in January driven off of record snows and cold. Our minimill and blast furnace indices had a good month, rising 15.8% and 13.7%, respectively, on rising prices. Our pipe & tube index increased 10.2% in December, most likely the result of OCTG producers announcing price increases (although monthly pricing data implies that the increases did not stick). Our specialty steel index posted the smallest increase in December, up 3.8%.