Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

These have been some interesting times for Acerinox (OTCPK:ANIOY) (ACX.MC), as this leading producer of stainless steel has had to navigate a weakening demand environment and volatile input prices. All things considered, I believe Acerinox management is doing pretty well, and I think the acquisition of VDM Metals will prove to be a savvy move down the line.

While I still liked Acerinox back in May, I thought there were other, better options to consider. Since then, Acerinox has done pretty well (local shares up 15%, the ADRs up closer to 20%), but Gerdau (GGB) and Aperam (OTC:APEMY) have done better, while Ternium (TX) has done worse (neither Gerdau nor Ternium compete in stainless). I still believe that Acerinox is undervalued, and while there is risk to the 2020 demand outlook, I like this company for its above-average productivity and efficiency, as well as its wider set of options to improve performance even further.

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Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

Acerniox Not Really At 'Can't Miss' Levels

To whatever extent I’m grudgingly interested in steel stocks today, it’s because some of the valuations appear to be pricing in bleak near-to-medium-term scenarios that don’t seem to fit with what is actually going on in the world (and that’s from someone who is pretty bearish relative to consensus). Unfortunately, Acerinox (OTCPK:ANIOY) (ACX.MC) doesn’t seem to offer that same margin of safety today. I continue to believe this is a well-run leader in stainless steel, but steel price momentum looks weak, several end-markets are softening, and the valuation isn’t really pricing in doom, gloom, or boom.

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Acerniox Not Really At 'Can't Miss' Levels

Acerniox Waiting For The Cavalry To Show Up

Acerinox (OTCPK:ANIOY) (ACX.MC) could really use some good news where pricing is concerned. Although tariffs have helped shield the U.S. stainless steel market, stainless hasn’t enjoyed the same pricing power or spreads as carbon steel in the U.S., and a surge of imports has hammered pricing in Europe and unwound expectations for a second half improvement. While there are hopes that protectionist measures from the EU will boost pricing in 2019, it doesn’t look as though margins will improve significantly from here.

I was reluctant to recommend Acerinox in my last update, and I’m glad I didn’t, as the shares have lost almost a third of their value since then. Acerinox has held up a little better than fellow Euro stainless players Outokumpu (OTC:OUTKF) and Aperam (OTC:APEMY), and AK Steel (AKS) in the U.S. (while Allegheny (ATI) has held up a little better), but it has been an ugly and disappointing year and it’s still not clear to me that a better 2019 will be good enough to make this a strong performer.

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Acerniox Waiting For The Cavalry To Show Up

Can Acerniox Deliver A Stronger Second Half?

One of the strongest bullish arguments for Acerinox (OTCPK:ANIOY) has been that the company’s strong leverage to the U.S. market (40% of production capacity) would significantly improve its pricing outlook and shield it from at least some of the risks of import competition in markets like Europe. Although that has been the case, and Acerinox has outperformed other stainless steel names like Outokumpu (OTCPK:OUTKY) and Aperam (OTC:APEMY), as well as other European steel names like voestalpine (OTCPK:VLPNY) and ArcelorMittal (MT) (which is really more of a global steel company), the shares are still down a bit from my last update and flat for the year as my worries about playing a mature steel cycle have apparently come to pass.

As is the case with voestalpine, it’s hard to recommend Acerinox shares now even though they do look meaningfully undervalued. European steel prices should recover in the second half of the year, but “should” is not a guarantee, and it’s tough to see what’s going to drive a significantly better outlook for these companies. While I do thing the value argument here is legitimate, and peak EBITDA could still be some distance away, investors need to at least consider the risk that Acerinox turns into a value trap.

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Can Acerniox Deliver A Stronger Second Half?

A Strong U.S. Market Can Support A Higher Price For Acerinox

Acerinox (OTCPK:ANIOY) hasn’t done as well as I’d expected since my January write-up, but it has been a relatively good house in a bad neighborhood, as stainless steel peers like Aperam (OTC:APEMY) and Outokumpu (OTCPK:OUTKY) have been considerably weaker, as have many other steel companies like ArcelorMittal (MT), Nucor (NUE), voestalpine (OTCPK:VLPNY) as investors worry about whether the cycle is peaking.

I regard Acerinox as a “rental”, not a long-term buy, with the company strongly leveraged to higher stainless prices in the U.S. (where it has around 35% to 40% share) but also vulnerable to lower prices in Europe and protectionist policies that could hurt its facilities in South Africa and Malaysia. Although I think there is still 10% to 15% potential from here, and possibly more if the cycle has longer legs, the long-term return potential is not all that appealing and investors often bail on these stocks when pricing momentum fades.

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A Strong U.S. Market Can Support A Higher Price For Acerinox

voestalpine's Positive Attributes Should Become Clearer In The Coming Years

Austrian steel company voestalpine (OTCPK:VLPNY, OTC:VLPNF, VOES.VI) may be the bane of copy editors for its penchant for using only lower-case letters, but it has proven itself to be a different sort of steel company - one that reinvests continually and pursues a high-tech, high-quality strategy that emphasizes profit per ton over volume of tons sold. That philosophy, and a history of above-average ROIC generation, has allowed voestalpine to outperform many of its peers over the longer term, including the likes of Acerinox (OTCPK:ANIOY), ArcelorMittal (NYSE:MT), Nucor (NYSE:NUE), and ThyssenKrupp (OTCPK:TYEKF), though Steel Dynamics (NASDAQ:STLD) has outdone them all by a wide margin.

Steel stocks in general, and European steel stocks in particular, haven’t done so well this year, and voestalpine is down about 12% (worst among that group). I believe this is creating an interesting opportunity; although the steel cycle may be at or past its peak momentum, I believe the company’s differentiated strategy will lead to better results, and better cash flow, down the road.

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voestalpine's Positive Attributes Should Become Clearer In The Coming Years

Acerinox Has More To Offer As A Trade

Commodity companies don't easily lend themselves to long-term buy-and-hold strategies, but they can still generate good gains for investors willing to be a bit nimbler with their moves. Acerinox (OTCPK:ANIOY) (ACX.MC) is up more than 50% from its cycle lows in 2015-2016, but these shares still appear to have some upside based on improving stainless steel demand, healthy pricing, and reasonable competition. What's more, while commodity stocks don't really trade on full-cycle cash flows, Acerinox is exiting a capex reinvestment cycle as the market is turning up - a positive development for margins and cash flows.

There is no easy answer to the "right" multiple to use in EV/EBITDA analysis, but I believe an 8x multiple is reasonable for Acerinox, given its place in the cycle and the stainless steel market. With such a multiple, the shares look about 10% undervalued with potential upside from a stronger/longer stainless up-cycle that would support even higher EBITDA estimates.

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Acerinox Has More To Offer As A Trade

Seeking Alpha: ArcelorMittal Looks To Ride Recovering Steel Demand Back Into The High Teens

As the world's largest steel producer, however steel markets go so goes ArcelorMittal (MT). That does not mean that the company cannot, or has not, make meaningful cost improvements and/or reposition production to take advantage of particular market opportunities, but ArcelorMittal is more leveraged to an overall European and North American steel recovery than more focused/specialized companies like Voestalpine (OTCPK:VLPNY) or Acerinox (OTCPK:ANIOY).

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ArcelorMittal Looks To Ride Recovering Steel Demand Back Into The High Teens