Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
Tracing Steel's Fiery Ascent by Sandra Ward
Summary: Barron's interviews steel industry guru Michelle Applebaum, who is 'conservatively upbeat' on steel stocks. A weak housing market has undeniably taken its toll on demand, but non-residential uses such as office buildings and hospitals are at peak levels. Global demand means traditional exporters are using more of their steel domestically, and U.S. steelmakers' market share is on the rise. Below are some brief thoughts on steel companies:
- Two stocks at the top of her list: 1) Nucor Corp. (NYSE:NUE) -- the price leader in 'long products' like steel bars, which are selling out in the U.S. Its recent 'production-oriented' compensation scheme has resulted in increased worker productivity, and its obsession with hedging and price-control put it way ahead of the game when hurricane Katrina saw natural gas prices at seven-fold. It has no debt and gives $1 billion/year to shareholders through dividends and share buybacks, yet commands a meager 10.5x P/E multiple.
- 2) Reliance Steel & Aluminum (NYSE:RS). Reliance has the only double-digit margins in the industry. The steel distribution market in which it plays is a $130 billion market, of which it has only $7 billion, offering lots of growth opportunity. Its 7x Ebitda [earnings before interest, taxes, depreciation and amortization] is average for the industry. [Ed. Reliance ranked 17th on this week's Barron's 500 top companies. See here.]
- Ryerson Inc. (NYSE:RYI) -- a Reliance competitor. Private equity firm Harbert Management is pressuring it because it has failed to live up to its potential. The press says Arcelor Mittal (NYSE:MT) is looking at the company. The two might join forces to buy it, which could force further industry alliances.
- AK Steel Holding Corp. (NYSE:AKS) -- they buy semi-finished steel. Their consumer-durable operation would be a great fit for U.S. Steel (NYSE:X), but more likely it will be bought out by a Japanese or European company looking for a foothold in the U.S. automotive market.
- Steel Dynamics Inc. (NASDAQ:STLD) -- May will be a good month; June will be better. Pricing on hot-rolled coil is up from $5.25 to $5.75 a ton.