The Zacks Steel Producers industry has staged a strong rebound after bearing the brunt of the pandemic, thanks to a revival in demand across major steel-consuming industries and favorable steel prices.
Healthy demand for steel in the key end-markets, including construction and automotive represents a tailwind for the industry. Despite the recent pullback, still-elevated steel prices should also drive the profitability of the industry players. Ternium S.A. TX, Commercial Metals Company CMC, TimkenSteel Corporation TMST and Olympic Steel, Inc. ZEUS are poised to gain from these trends.
About the Industry
The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products. Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world’s total consumption.
What’s Shaping the Future of the Steel Producers’ Industry?
Demand Strength in Major End-use Markets: Steel producers are well-positioned to gain from an upswing in demand across major steel end-use markets such as automotive, construction and machinery from the coronavirus-led downturn. Steel demand started to pick up from the third quarter of 2020 on the resumption of operations across major steel-consuming sectors following the easing of lockdowns and restrictions across the world. The construction sector has bounced back on the heels of a resumption of projects that were stalled due to supply chain disruptions and manpower shortage. Order activities in the non-residential construction market remain strong, underscoring the underlying strength of this industry. Steel makers are also expected to benefit from higher-order booking from the automotive market in second-half 2022 as the semiconductor crisis gradually eases and automakers ramp up production. Demand in the energy sector has also improved on the back of a spike in oil and gas prices. Favorable trends across major markets augur well for steel demand.
Still-Elevated Steel Prices to Aid Margins: Steel prices staged a strong recovery and hit record levels last year on the back of an upturn in demand across key markets, tight supply conditions and low steel inventory throughout the supply chain. Notably, U.S. steel prices skyrocketed to all-time highs last year after cratering to the pandemic-induced multi-year lows in August 2020. The benchmark hot-rolled coil (HRC) prices broke above the $1,900 per short ton level in August 2021 and eventually peaked in September. But prices have lost steam since October, dragged down by stabilization of demand, improved supply conditions and higher steel imports. Since Russia invaded Ukraine, steel prices significantly rebounded and surged to nearly $1,500 per short ton in April 2022 on supply worries and a spike in lead times. However, prices have retreated since then partly reflecting shorter lead times and fears of a recession. Despite the recent downward correction, HRC prices remain above the $1,000 per short ton level and are likely to find support from healthy end-market demand. Still-favorable prices are expected to drive profitability and cash flows of steel-producing companies over the near term.
Slowdown in China A Worry: Steel demand in China, the world’s top consumer of the commodity, has softened since the second half of 2021 due to a slowdown in the country’s economy. A downturn in the country’s real estate sector contributed to the slowdown. New lockdowns are also taking a significant toll on the world’s second-largest economy. A slowdown in manufacturing activities has led to the contraction in demand for steel in China. The manufacturing sector has taken a beating as the virus resurgence has hit demand for manufactured goods and the supply chains. Beijing’s actions to take the heat out of its property market partly through credit tightening measures is also a concern for the country’s steel industry.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #95, which places it at the top 38% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Steel Producers industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 19.3% over this period compared with the S&P 500’s decline of 9.2% and the broader sector’s decline of 16%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 2.27X, below the S&P 500’s 12.55X and the sector’s 5.41X.
Over the past five years, the industry has traded as high as 11.62X, as low as 2.19X and at the median of 7.22X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Steel Producers Stocks to Keep a Close Eye on
Ternium: Luxembourg-based Ternium, carrying a Zacks Rank #1 (Strong Buy), is a leading producer of flat and long steel products in Latin America. It is expected to benefit from strong demand for steel products and higher realized steel prices. Its shipments in Mexico are likely to be aided by healthy demand from industrial customers and the gradually improving automotive market. Healthy demand for construction materials is also expected to support shipments in Argentina. Ternium is also benefiting from the cost competitiveness of its facilities. TX is also taking actions to boost liquidity and strengthen its financial position in the wake of the pandemic. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Ternium’s current-year earnings has been revised 39.3% upward over the last 60 days. TX also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 22.4%.
Price and Consensus: TX
Commercial Metals: Texas-based Commercial Metals, sporting a Zacks Rank #1, manufactures, recycles and markets steel and metal products, related materials and services. It is gaining from robust steel demand, stemming from a growing downstream backlog and solid levels of new construction work entering the project pipeline. It continues to witness stellar demand for steel products across most end markets. Healthy construction markets will likely support strong rebar and wire rods demand in North America. Steel sales volumes in Europe are anticipated to remain firm on increasing demand from the construction and industrial end market. CMC also continues to gain from its ongoing network optimization efforts. It also has solid liquidity and financial positions, and remains focused on reducing debt.
Commercial Metals has an expected earnings growth rate of 31.5% for the current fiscal year. The Zacks Consensus Estimate for the current fiscal-year earnings for CMC has been revised 42% upward over the past 60 days. The company has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 15.1%.
Price and Consensus: CMC
Olympic Steel: Ohio-based Olympic Steel, carrying a Zacks Rank #1, is a leading metals service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin plate, and metal-intensive branded products. ZEUS is benefiting from its strong liquidity position, actions to lower operating expenses, and strength in its pipe and tube and specialty metals businesses. Improving industrial market conditions and a rebound in demand are expected to support its volumes. The company’s strong balance sheet also allows it to invest in higher-return growth opportunities.
The Zacks Consensus Estimate for Olympic Steel’s current-year earnings has been revised 84.1% upward over the last 60 days. ZEUS has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 44.9%.
Price and Consensus: ZEUS
TimkenSteel: Ohio-based TimkenSteel engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company is benefiting from higher industrial and energy demand and a favorable pricing environment notwithstanding the semiconductor supply-chain disruptions that are affecting shipments to mobile customers. TMST is seeing continued recovery in its industrial markets. Higher end-market demand and cost-reduction actions are also aiding its performance. It is gaining from its efforts to improve its cost structure and manufacturing efficiency.
TimkenSteel, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 29.3% for the current year. The consensus estimate for current-year earnings has been revised 9.2% upward over the past 60 days. TMST surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 39.8%.
Price and Consensus: TMST
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Ternium S.A. (TX) : Free Stock Analysis Report
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Timken Steel Corporation (TMST) : Free Stock Analysis Report
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