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The commodity market, especially for steel, after the US financial meltdown, was being driven by Chinese demand. Last year, steel and scrap prices experienced a sharp declining trend, which has now reversed to some extent. US sheet prices have recently outperformed the rest of the world and appreciated more than the appreciation witnessed by iron ore. However, trading at a premium leaves little room for further appreciation. We have a cautious stance on the US steel market due to the mixed signals received from various ends.

U.S. carbon sheet prices are expected to trade flat in the near term. Imports are now hurting the U.S. Steel producers due to an increased price differential between local and imported steel. Moreover, the recent strengthening of the US dollar is likely to turn competition in favor of importers. Increased imports and consistent local production will lead to an excess supply which may not be offset by the relatively stable demand of steel. Moreover the input prices for steel are currently observing a downward trend. Scrap prices have also fallen by $30-50/ton in February on a month-on-month basis. Lead times are shortening, while discount offering is becoming a regular feature in the steel market. A fall in the scrap prices during February 2012 is expected to keep up the pressure on HRC prices.

Steel prices are now dependent upon the Chinese stock-piling activity which usually happens post the Chinese New Year. Although, the Chinese government's intent to support the social housing sector might be a good signal for the steel sector, nevertheless, the already overheated property sector in China cannot be ignored.

Given the sharp appreciation recently witnessed in US sheet prices, the S&P 500 Steel index has outperformed the market with a 13% appreciation compared to the S&P 500 Index's 5.3%. Two of the companies discussed below have so far appreciated by over 20%, while one has underperformed also. Overall we believe that the current valuations are justified, and therefore, we do not expect any further out performance of the S&P 500 Steel Index against the S&P 500 Index.

Allegheny Technologies (NYSE:ATI) is a producer of diversified specialty metals, including titanium, nickel, advanced powder, steel and tungsten-based alloys. The company also manufactures cutting tools, carbon alloy impression die forgings, and large grey and ductile iron castings. It operates in three segments: High Performance Metals, Flat-Rolled Products and Engineered Products. Allegheny, returning 1% on a year-to-date basis, has underperformed compared to its peers' average returns of 15.6% and the broader market index returning 5.3%. The stock is trading at forward price to earnings ratio of 12.1 times and an EV/EBITDA of 10.5 times.

The stock offers a dividend yield of 1.6%, while its forward revenues and earnings per share are expected to increase by 0.4% and 45.4% respectively. Allegheny is expected to trade at a premium compared to its peers due to the higher barriers to entry and continued demand for its specialty metals. Given its underperformance compared to its peers and relatively strong fundamentals, we expect the stock to appreciate in the near term. Hence, we recommend the stock for investing.

Nucor (NYSE:NUE) manufactures steel and steel products, including direct reduced iron used in the company's steel mills. It operates in three segments: steel mills, which produce steel sheets - hot and cold-rolled, steel products, and raw materials. In December, 2010, Nucor, along with Mitsui & Co. formed a new company named NuMit LLC, in which it owns a 50% interest. Nucor's stock is currently trading at a forward price to earnings ratio of 11.1 times and a 12 month trailing EV/EBITDA of 8.1 times in line with its peer average.

The stock also offers a decent dividend yield of 3.2% compared to a peer average of 1.7%, along with a free cash flow yield of 4.1%. The company's revenues for CY12 are expected to remain flat while earnings per share are expected to grow by 29.4%. The year-to-date return posted by Nucor, so far, has been in line with its peers, outperforming the broader index (SPX Index) by 9.5%. Given a relatively strong balance sheet and a high dividend yield, we believe the stock should trade at a premium to its peers, and hence, is likely to outperform going forward.

Steel Dynamics (NASDAQ:STLD) is a steel producer and metals recycler in the United States. The Company operates in three segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations. During 2010, the company's metals recycling shipments stood at 5.2 million tons of ferrous materials, while its steel shipments stood at 5.3 million tons. We recommend investing in the stock primarily on the basis of its valuations. The stock is currently trading at a forward price to earnings ratio of 8.8 times and a 12M trailing EV/EBITDA of 7.1 times, compared to its peer average of 11.0 times and 7.8 times respectively.

Steel Dynamics also offers a dividend yield of 2.4%, while its free cash flow yield stands at 7.0%. Revenues for the company are expected to remain flat, while its forward earnings per share are expected to grow by 22.6%. Although, the short-term triggers for the stock seem limited, given a year-to-date appreciation of 25%, nevertheless, it is likely to perform well in case steel prices recover.

AK Steel Holding Corporation (NYSE:AKS), through its wholly owned subsidiary, AK Steel Corporation, operates seven steelmaking and finishing plants that produce flat-rolled carbon steels (coated, cold-rolled and hot-rolled), and specialty stainless and electrical steel. The holding company also owns AK Tube LLC, which finishes flat-rolled carbon and stainless steel into welded steel tubing used by the automotive, large truck and construction industry. We do not like the fundamentals of the company on the basis of our expectations that company may need to approach the debt or equity markets to support its raw material segment and to meet its pension liabilities. Moreover, the company is also expected to face a cash short fall in 2014. Besides this, the company has not been following its competitors in pursuing lightweight, high-strength steel technology.

The valuations for the company seem justified given the weak fundamentals. The stock is currently trading at forward price to earnings ratio of 6.5 times and a 12M trailing EV/EBITDA of 6.8 times. The dividend yield from the company stands at 2.3%. Although the revenues are only expected to increase by 0.2% year-on-year, earnings per share are expected to recover and increase by 80%. In any case, we believe that the massive expected earnings per share recovery is already priced in.

Reliance Steel & Aluminum (NYSE:RS) provides metals processing services and distributes a line of more than 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products, to more than 125,000 customers. Reliance's network of metals service centers span over more than 38 states. In February 2012, the company acquired McKey Perforating Co. Inc. Its stock has posted year-to-date returns of 15%, which is in line with its peer average. However, it trades at a slight discount to its peers, at forward price to earnings ratio of 10.6 times and a 12M trailing EV/EBITDA of 8.4 times (peer average of 11.0 times and 7.8 times respectively). We believe this slight discount is justified with respect to an expected dividend yield of 0.9% and a forward earnings per share growth of 18.7%, which are both below peer averages at 1.7% and 33.7% respectively. Hence, at current valuations, we maintain a neutral stance on the stock.

Schnitzer Steel (NASDAQ:SCHN) is a recycler of ferrous and nonferrous scrap metal and a manufacturer of finished steel products. The company recycles used and salvaged vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap and construction demolition from bridges, buildings and other obsolete structures. In October 2009, it acquired four used auto parts stores, and acquired another two in January 2012. Schnitzer also acquired a metal recycler in April 2010along with acquiring the American Metal Group, Inc. in April 2011. We have a Neutral stance on the stock on the back of slow growth expected from US and Asia.

Although the stock is trading at cheaper multiples compared to its peers, with a forward price to earnings ratio of 9.1 times and a 12M trailing EV/EBITDA of 7.7 times, we find it to be unattractive at current levels. This is mainly because the dividend yield offered by the company remains very low at 0.2%, while the free cash flow yield is 0.7%. Revenues for the company are expected to remain flat, but the earnings per share are expected to grow by 43.8%.

US Steel (NYSE:X) is an integrated steel producer of flat-rolled and tubular products, with major production operations in North America and Europe. US Steel has a capacity of producing 31.7 million tons of raw steel annually. The company is also engaged in other business activities, such as transportation services (railroad and barge operations) and real estate. The company's primary operations are headed under three different segments: Flat-rolled Products, U. S. Steel Europe and Tubular Products. The stock's year-to-date performance has been 21.9% compared to its peer average of 15.6% and the SPX Index's performance of 5.3%.

At current prices, the stock gives mixed signals - trading at a cheaper forward price to earnings ratio of 8.7 times, while slightly expensive at a 12M EV/EBITDA of 10.0 times. The free cash flow yield offered by US Steel remains negative (-14.6%), while its dividend yield is also very low at 0.6%. Although revenues and earnings per share are expected to increase by 0.2% and 41.0% respectively, given its outperformance and unattractive valuations, we maintain a Neutral stance on the stock.

Ticker

Name

Last Price

Rtn YTD %

Mkt Cap

P/B Ratio

Fwd P/E

Exp. Div Yld

FCF Yld

EV/
EBITDA TTM

Exp. Rev. Grwth

Exp. EPS Grwth

AKS

AK STEEL HOLDING CORP

8.8

6.4

969

1.2

6.5

2.3

(40.3)

6.8

0.2

79.9

FCX

FREEPORT-MCMORAN COPPER

46.5

27.1

44,059

2.3

8.5

2.7

9.6

4.5

-

27.4

TCK/B

TECK RESOURCES LTD-CLS B

43.4

20.9

25,549

1.2

10.2

1.9

10.0

5.4

0.8

0.3

NUE

NUCOR CORP

45.4

14.8

14,382

2.6

11.1

3.2

4.1

8.1

0.0

29.4

AA

ALCOA INC

10.8

24.8

11,452

1.1

12.2

1.3

7.9

6.8

0.1

67.7

CLF

CLIFFS NATURAL RESOURCES INC

75.1

20.5

10,743

1.7

7.3

1.4

15.6

5.5

(0.5)

(8.7)

BTU

PEABODY ENERGY CORP

38.0

14.7

10,291

1.7

8.2

0.9

4.6

7.7

0.0

33.0

CNX

CONSOL ENERGY INC

37.7

3.0

8,544

2.2

12.0

1.3

1.7

6.9

(0.3)

15.7

ATI

ALLEGHENY TECHNOLOGIES INC

48.3

1.0

5,135

2.9

12.1

1.6

0.2

10.5

0.4

45.4

ANR

ALPHA NATURAL RESOURCES INC

22.8

11.5

5,007

0.7

20.8

0.0

8.2

9.5

(0.2)

(47.8)

X

UNITED STATES STEEL CORP

32.3

21.9

4,644

2.6

8.7

0.6

(14.6)

10.0

0.2

41.0

RS

RELIANCE STEEL & ALUMINUM

56.0

15.0

4,198

2.7

10.6

0.9

0.6

8.4

-

18.7

STLD

STEEL DYNAMICS INC

16.5

25.3

3,604

2.0

8.8

2.4

7.0

7.1

(0.0)

22.6

ACI

ARCH COAL INC

15.7

8.2

3,322

1.0

7.4

2.8

14.6

8.1

(0.0)

78.4

CRS

CARPENTER TECHNOLOGY

56.7

10.4

2,506

3.3

16.7

1.3

(0.9)

10.9

(0.0)

34.4

CMC

COMMERCIAL METALS CO

14.7

7.1

1,697

1.5

8.4

3.7

(1.2)

10.5

(0.1)

63.0

WOR

WORTHINGTON INDUSTRIES

19.2

17.5

1,336

2.3

10.0

2.5

8.0

10.5

-

27.6

SCHN

SCHNITZER STEEL INDS INC-A

45.6

7.8

1,282

NA

9.1

0.2

0.7

7.7

(0.0)

43.8

CENX

CENTURY ALUMINUM COMPANY

11.0

29.0

984

0.7

25.5

NA

2.4

4.7

(0.3)

87.7

MUSA

METALS USA HOLDINGS CORP

14.1

25.7

524

2.3

6.4

NA

(2.4)

6.2

0.1

14.6

Average

15.6

8,011

1.9

11.0

1.7

1.8

7.8

0.0

33.7

Source: Bloomberg.

Source: 2 Steel Stocks To Buy, 5 To Avoid