Are Steel Stocks Cheap?

Includes: AKS, MT, X
by: Mark Riddix

The market drop of the past two weeks has not been kind to steel stocks. While the market drop has caused some stocks to become undervalued, some clearly are still not a bargain. It is important for investors to be able to differentiate between the two. There are a couple of steel stocks that still appear to be moving toward buy status with their recent price drop.

US Steel (NYSE:X) has stumbled big time from its $46 valuation of just a month ago. The country’s largest steelmaker now trades at just $28 a share. The steelmaker is moving back to buy territory with its recent stock price slide. U.S. Steel just reported a great earnings number booking $1.33 per share in EPS. Demand for tubular and flat rolled steel is still strong despite the contraction in financial markets. U.S. Steel is benefiting from lower input pricing as iron ore prices have plunged. This stock is a solid buy iat its current price.

Arcelor Mittal (NYSE:MT) is the definition of a cheap steel stock. The company’s shares trade at below nine times earnings and the company just had a really profitable quarter. Revenue was up nearly 25% as the company was able to raise prices due to strong demand for its steel products. Both domestic and international steel prices were up for the quarter. Arcelor Mittal is so confident about its future that the company bumped up its forecast for Q3. That is a bold move when so many companies are cautious about their forecasts. Mittal offers a much more attractive dividend than most other steel companies. The company pays a dividend of 75 cents per share, which is a great 3.3% yield.

AK Steel (NYSE:AKS) is the riskiest play in the steel sector. The company’s shares have dropped to the single digits as of the close of the market on Friday. AK Steel’s earnings failed to impress the street a week ago and the stock suffered. Earnings came in at just 30 cents per share versus the 50 cents earnings estimate. That is a big miss when larger companies like Mittal and US Steel were beating Wall Street expectations. The company blamed its poor report on higher than expected iron ore prices. AK Steel failed at passing its higher input prices onto customers. Shares of AK Steel could get ridiculously cheap if the market has another huge drop like on Monday. That would make the stock an interesting speculative buying candidate. The 2.2% dividend yield can provide some income for patient investors.

Disclosure: I am long MT.