This country has been built on steel. Roads, buildings, cars and myriad other products have steel as a component. Whole cities, such as Gary, Pittsburgh, and Birmingham, were built on steel. Yet the steel industry in this country has been in decline for some time. Even the U.S. military procures its high-end steel from foreign sources. Eight of the ten largest steel companies in the world are based in East Asia.
I am going to analyze a handful of the largest steel companies here and abroad. Steel making is a highly cyclical business, and all of these companies struggled mightily in 2009 and 2010. Their ability to recover successfully has much to do with their current financial health and balance sheets.
MT is the result of a 2006 merger between Mittal Steel Company and Arcelor. The resulting company remains the largest integrated steel company in the world, and by a large margin. MT was trading recently at about $18 per share, near the low end of its 52 week range of from $38.88 to $14.77. It has a market capitalization of $28.2 billion, and a P/E of 12. It pays an annual dividend of $0.64, for a yield of 3.6%
MT had a rough third quarter. It posted profits $0.19 per share, down 79% from the third quarter of 2010, and down 80% from the second quarter of 2011. MT explained that in the first half of 2011, customers had replenished steel inventories, thus slackening third quarter product demand. Since then, things have improved, as pricing is showing signs of strengthening.
When (not if) steel demand does improve, MT has the resources to take advantage of it. It is obviously interested in being further integrated by developing more of its own raw materials; hence in late 2010 it bought Imperial Crown Trading to obtain more iron ore assets. In 2011, MT joined with Peabody Energy Corp. (BTU) to buy a controlling stake of Australia's Macarthur Coal.
MT's balance sheet remains in solid shape, with its long term debt of roughly $25 billion comprising less than 30% of capitalization. Due to its enormous size and geographically diverse scope, I like MT a lot over the next two to three years, and I would not be surprised to see its stock double or more back toward its 2011 high by late 2012.
Nucor Corp. (NUE)
Nucor is a large domestic steel maker. It is the world's 12th largest steel company. Its stock was trading recently at almost $40 per share. Its 52 week range is from $49.24 to $29.82. It has a market capitalization of about $12.5 billion, and a P/E of 20. It pays an annual dividend of $1.46, for an annual yield of 3.7%.
Nucor had a poor third quarter, though not as poor as the one MT had. Nucor posted earnings for the quarter of $0.57 per share, which was up from $0.05 per share a year ago, but down from $0.94 in the second quarter of 2011. As with MT, lower prices and margins than anticipated accounted for the poor net. Nucor released its 4th quarter 2011 estimate, calling for earnings of 22-27 cents per share. In the 4th quarter of 2010, Nucor reported a loss of four cents per share.
Unlike other steel companies, the bulk of Nucor's production is from recycling product. It is at the mercy of having adequate materials to fulfill its production target, but local recycling programs are encouraging ever more metals to be recycled.
Nucor has not made any substantial purchases in the past four years, and with long term debt just 36% of capital and over $4 billion in cash equivalents on its books, it has flexibility to modernize its own facilities, acquire a competitor, or both. Like all steels, Nucor is leveraged to economic conditions. Being an optimist, I like Nucor over the intermediate to long-term horizon. Its class leading dividend yield allows added appeal
POSCO is based in South Korea, and is the world's third largest steel company. Its ADRs were trading recently at about $82 per share. It has a 52 week range of $118.00 to $70.47, and a market capitalization of $25.4 billion. It has a P/E of about 9, and pays an annual dividend of $2.25 per share, for an annual yield of 2.8%.
Business is booming for Posco. Nearly all of its manufacturing is done at one of two massive South Korean plants, and from those will come over 30 million tons of steel this year. The output includes everything from stainless steel to ship construction steel. About 57% of its sales are to its home South Korean market, which is experiencing growth in shipbuilding, appliance sales, and auto manufacturing.
Posco is in position to post record earnings this year and next. Because of currency and accounting issues, it is not easy to pin down Posco earnings. Rest assured, it did not earn $54,000 per share in 2010. In the third quarter of 2011, Posco earned about $951 million, which was just two percent higher than the year ago quarter. But it was 33% below the second quarter of 2011, and unless worldwide demand for steel rises, Posco's profits will continue to struggle on a comparison basis.
Posco has institutional support from the likes of Charles Brandes, with 129,000 shares. But there are risks of North Korean instability as well. I do not believe North Korea will materially impact Posco, and am not concerned; I am concerned about Posco's earnings. I do not like it for the next year.
Carpenter Technology Corp. (CRS)
Carpenter is a leading maker of finished metal alloys, stainless steel and titanium chief among them. Its stock was trading recently at about $52 per share. Its 52 week range is from $60.00 to $36.59, and it has a market capitalization of $2.3 billion. It has a P/E of 26. It pays a quarterly dividend of $0.18 per share, for an annual yield of 1.4%.
In Carpenter's latest fiscal quarter of 2011, it reported profits of $24 million, or $0.53 per share. That represented a near tripling or both the year ago quarter, and the preceding quarter. This was the result of an 18% sales increase, largely due to the June, 2011, $558 million purchase of Latrobe Specialty Steel Co. Carpenter's focus on specialty metals helps it avoid commodity pricing issues that are facing some of its larger competitors.
Despite my acknowledgment that Carpenter is posting excellent earnings, I believe that fact already is accounted for in the current stock price. So while other steel companies are trading at about book value, Carpenter is trading for about three times book value. I would likely hold onto the stock if I already owned it, but now is not the time to acquire it.