Steel Dynamics Thriving As Efficient Operations Meet Record Prices

 

The steel market has not only stayed stronger than I expected early in the second half of the year, it’s gotten even stronger as high prices and limited capacity growth have done nothing to temper buyers’ demand for steel. That’s created windfall opportunities for Steel Dynamics (STLD), one of the best operators in the world, and one with leverage to near-term capacity growth.

Steel Dynamics shares are up more than 60% since my bullish call in February, and while Nucor (NUE) has done even better (up more than 90%), as has Ternium (TX), which I own, most others, including ArcelorMittal (MT), Cleveland-Cliffs (CLF), and U.S. Steel (X) have lagged (though the 40%-plus performance of Cleveland Cliffs, the weakest of the three, is hardly bad).

Given remarkable, and frankly unprecedented, restraint and discipline among industry participants, I believe pricing can stay strong into 2022, though I do expect prices to come back down to around in 2022. My blended EBITDA valuation approach suggests that the shares should trade around $70, but I could still argue for upside toward $80 today.

 

Click the link to continue reading: 

Steel Dynamics Thriving As Efficient Operations Meet Record Prices

Steel Dynamics Ideally Positioned To Leverage Soaring Steel Prices

The last four months have shown that I was too hasty in shifting my outlook on Steel Dynamics (STLD) from "buy" to "hold", as steel prices have rocketed higher on industrial restocking (especially auto companies) and steel companies have been surprisingly slow to restart shuttered mills, with capacity utilization still at only 75% despite spot prices of close to $1,200 per ton. With some buyers still reluctant to place orders ahead of expected capacity additions (which should lower prices), and Steel Dynamics benefitting from a lag in realizations, the first half of 2021 should look quite good.

Then again, I do still believe that prices will weaken in the second half as restocking fades and more capacity comes online. Likewise, I'm still not as bullish on the outlook for non-resi construction in 2021 or 2022.

While I was premature downgrading Steel Dynamics in October, I would note that the share price appreciation of roughly 25% since then has been outshone by Acerinox (OTCPK:ANIOY) (up about 35%), Alcoa (AA) (up 57%), and Ternium (TX) (up 35%) - all of which I recommended in lieu of Steel Dynamics. As things sit today, I like Steel Dynamics more, and I do think infrastructure stimulus could provide a kicker. I don't know that I can say Steel Dynamics is my favorite name now, but I do see some upside here.

 

Read more here: 

Steel Dynamics Ideally Positioned To Leverage Soaring Steel Prices

Auto Restocking Drives A Tighter Sheet Steel Market For Steel Dynamics, But Capacity Remains A Threat

The U.S. steel industry saw better operating conditions in the third quarter than I'd expected, due in part to auto OEMs and suppliers restocking their inventories and also due to a somewhat unusual level of discipline among market participants that has kept more capacity offline. With its very efficient operating assets, Steel Dynamics (STLD) has been able to stay active when others haven't, allowing the company to benefit from better sheet prices.

I'm still cautious on the sector going into 2021, though. I do expect non-residential demand to weaken and oil/gas demand to stay weak. Auto demand should be better, but with more than a third of industry sheet capacity offline, I believe pricing power could be at risk as these higher prices will, ultimately, coax some restarts.

I've liked Steel Dynamics for a little while, but with the shares up more than a third since my April article, I see STLD shares as more of a "hold" than a "buy", and my preferences lean more towards names like Acerinox (OTCPK:ANIOY) and Ternium, as well as non-steel names like Alcoa (AA). While I do still believe this is an absolute top-notch player in the space, I don't like the combination of potentially weaker non-resi demand and oncoming supply increases (both reactivated capacity and new capacity).

 

Follow this link to the full article:

Auto Restocking Drives A Tighter Sheet Steel Market For Steel Dynamics, But Capacity Remains A Threat

Steel Dynamics Getting More Of Its Due As Demand Starts To Recover

When I last wrote about Steel Dynamics (NASDAQ:STLD), I found it a little strange that the shares had been left behind in the short-cycle industrial recovery. Although I wasn’t, and still am not, all that bullish on pricing, given considerable under-utilized capacity in the industry and more capacity coming online in the near future, I thought upturns in steel-consuming markets like autos and heavy machinery and ongoing near-term strength in non-resi construction would support a better demand outlook.

Since then, Steel Dynamics raised guidance for the third quarter on stronger shipments to the auto and non-resi construction end-markets, and the shares have risen about 17% since then, outpacing industrial stocks and closing that gap I had seen before. With that two-month move, I see the shares now more as “fairly-valued” rather than particularly cheap, and while I wouldn’t be in a rush to sell on this momentum, I do think the risk of weaker non-resi markets in 2021-2022 remains a meaningful consideration.

Read more here: 

Steel Dynamics Getting More Of Its Due As Demand Starts To Recover

Steel Dynamics Looks Undervalued As A Lagging Trade On The Short-Cycle Recovery

I turned more positive on Steel Dynamics (NASDAQ:STLD) after the last quarter, largely on a "it's really not that bad" call, and the shares have done alright since then, with the 19% total return beating the S&P by a bit, as well as beating other steel names like Nucor (NUE) (though not Commercial Metals (CMC)). That decent performance has come despite a pretty weak underlying steel market that has seen steel largely get left behind compared to many basic metals over the last few months.

I think management's guidance may be a bit too bullish, and I'm concerned about the long-term impact of capacity additions in the U.S. market, but I still think the shares are too cheap relative to the long-term/full-cycle earnings and cash flow-generating capability of this company. I still believe Steel Dynamics has a solid claim to "best of breed" (with Nucor and CMC in that mix too), and I think buying best-of-breed names when the stock has been punched in the face generally works out okay.

Read more here:
Steel Dynamics Looks Undervalued As A Lagging Trade On The Short-Cycle Recovery

Steel Dynamics Offers Value, But It's Going To Be Ugly

I wasn’t all that bullish on Steel Dynamics (STLD) back in January, but I did say it was worth another look if the price fell into the $20’s. I certainly wasn’t expecting the global Covid-19 outbreak at that point, and that makes the valuation discussion interesting. I think the steel industry is looking at a tough stretch (tougher than the CEOs seem to be expecting/projecting), but I also think Steel Dynamics is among the best-run in the group, and I think it’s better to own EAF operators than blast furnace operators during tough times.

It’s difficult to recommend a commodity stock given the severe disruptions across its most important markets, let alone the meaningful capacity growth that’s coming over the next 18 months. Still, I don’t think my expectations are that aggressive, and the shares do look undervalued. If you can handle the risk, this may be a name to consider now.

Click here for the full article:
Steel Dynamics Offers Value, But It's Going To Be Ugly

Wobbly Pricing And Uncertain Demand Weigh On Steel Dynamics

I haven’t been very bullish on U.S. steel companies, and I don’t feel like I’ve missed out on much, with Steel Dynamics (STLD) and Nucor (NUE) both down almost 10% over the past year. Steel Dynamics’ share price is getting more interesting again, but I’m concerned that the market will take the restocking demand we’re seeing now as a new starting point and overestimate potential volume and price growth in 2020. To that end, I think Steel Dynamics management is probably overly optimistic with respect to its demand and pricing expectations for the year.

Even though I’m concerned about where expectations are now for the sector, I do see some potential value here. I’d rather let the reset play out first, as I think Steel Dynamics shares will retest the $20s, but if and when that happens, this would be a name to reconsider.

Read the full article here:
Wobbly Pricing And Uncertain Demand Weigh On Steel Dynamics

Steel Dynamics Holding Up Through Tough Demand Conditions

I wasn’t bullish on the prospects for the U.S. steel sector when I last wrote about Steel Dynamics (STLD) and Nucor (NUE), and the additional destocking and steel price weakness that I expected back then has in fact taken place. While both Steel Dynamics and Nucor saw nasty declines into late August, the share prices have since recovered, reducing the incremental declines in the share prices to the low single digits.

As the market gets more realistic about the real health of the steel market (and the U.S. industrial economy), I get a little more bullish on Steel Dynamics, as this earning cycle has seen another $165 million come out of the average sell-side 2019 EBITDA estimate and about $225M come out of the 2020 number (after roughly $100M adjustments back during second quarter earnings). I’m still concerned about the health of the U.S. economy, the prospects for an end to the U.S.-China trade dispute, and potential competitive capacity additions, but were Steel Dynamics to take another trip toward the mid-$20’s, I’d have to consider picking the shares as a cyclical trade idea.

Click here to continue:
Steel Dynamics Holding Up Through Tough Demand Conditions

Steel Dynamics Hoping To Put A Rough First Half Behind It

I’ve been relatively bearish on the outlook for U.S. steel companies this year, and so far that call has mostly worked out, with earnings coming in lower than initially expected for both the first and second quarters. While Steel Dynamics (STLD), Nucor (NUE), U.S. Steel (X), and Commercial Metals (CMC) are all up on a year-to-date basis, their performance has lagged the broader markets and the industrial sector. More specific to Steel Dynamics, while I thought this one looked a little better than Nucor from a valuation perspective last quarter, I thought Nucor had a better product mix for the near term conditions, and the share price performances have been pretty similar.

Both Nucor and Steel Dynamics managements are more bullish than I am about their second-half prospects. I see the key non-residential construction market continuing to slow (still growing, but a decelerating rate), I’m not optimistic about a big recovery in auto volumes, and I see more risk of inventory destocking across machinery and manufacturing leading to more sluggish steel demand growth. Although Steel Dynamics’ valuation isn’t bad, I see more downside risk to expectations and performance than upside risk, and I’m inclined to stay on the sidelines with U.S. steel companies.

Continue here:
Steel Dynamics Hoping To Put A Rough First Half Behind It

Ternium Beaten Up, But The Quality Is Still There

The six months since my last article on Ternium (TX) have not been kind to the steel sector in general, nor this Mexican steelmaker in particular, with the shares down about 16% and roughly doubling the decline of the sector. While the sector has been pressured by weaker prices, rising costs, and concerns about demand growth in 2019 and beyond, Ternium too has been squeezed by pricing and costs, not to mention weaker-than-expected demand in its key operating regions.

Macro factors remain my biggest worry with Ternium, as construction activity has yet to turn in Mexico and Argentina’s “recovery” is at best looking like a drawn-out process. Improving demand in Brazil should help, but global weakness in the auto industry remains a point of pressure for the company. Given Ternium’s excellent margins (even in comparison to leaders like Nucor (NUE) and Steel Dynamics (STLD) ), longer-term prospects in both Mexico and Brazil, and the valuation, this is still a name I like within the steel sector.

Read the full article here:
Ternium Beaten Up, But The Quality Is Still There

Gerdau's Share Price Weakness May Not Be Entirely Reasonable

I was skittish about the near-term performance prospects for Gerdau (GGB) back in early December, and the shares have fallen about 10% since then – modestly underperforming a weak steel sector over that time. Gerdau’s share price performance hasn’t been helped by weaker steel prices in the U.S., nor a slower-to-develop recovery in Brazil, and costs continue to rise in the meantime.

I’m not all that bullish on the U.S. steel sector, but I think Gerdau has significantly upgraded their U.S. operations, and I’m more bullish on the prospects for Brazil’s steel sector over the next few years as the country makes a tentative economic recovery. Like Ternium (TX), I think Gerdau could be positioned to post EBITDA and FCF growth at a time when U.S. steelmakers will have more lackluster results, and a stronger recovery in Brazil could maintain investor enthusiasm for that region. I’m less bullish on Gerdau relative to the sell-side, but below $4/share, I think these shares are worth a look.

Read the full article here:
Gerdau's Share Price Weakness May Not Be Entirely Reasonable

Steel Dynamics Has Near-Term Challenges, But The Valuation Is Getting Interesting

I was “cautious” on Steel Dynamics (STLD) back in January due to the challenges that come with descending from a cyclical peak, but it has still been among my favorite steel names for some time. To that end, I’m a little surprised that it has underperformed the sector since that last article, though another of my preferred names, Ternium (TX), has done even worse, while Nucor (NUE) has done a little better. On the other hand, a quick look at AK Steel (AKS), ArcelorMittal (MT), Gerdau (GGB), or U.S. Steel (X) and you realize it could still be worse.

I still believe this is a very well-run steel company, but I’m also still concerned about the underlying health of the U.S. short-cycle economy, the prospect of weaker demand and prices, and higher conversions costs. If that weren’t enough, there’s also the matter of meaningful U.S. capacity additions in sheet steel over the next few years. I do believe that Steel Dynamics is undervalued and might have some longer-term appeal now (particularly for investors with a more bullish outlook on the U.S. economy), but I do think Nucor has the better product mix for the next 6 to 18 months.

Read more here:
Steel Dynamics Has Near-Term Challenges, But The Valuation Is Getting Interesting

ArcelorMittal Lagging On Weaker Markets And Margins

Steel hasn’t been a particularly popular sector over the past three months, with the sector down about 7% or so. Unimpressive as that is, it’s downright aspirational for ArcelorMittal (MT), which has seen its share price drop about 20% over that time, with a significant drop in just the last two weeks. Between uninspiring prices in most of its markets, higher costs, and concerning macro signs, there are plenty of contributing factors to consider.

I’ve said it before and it merits repeating – stocks don’t go up just because they’re cheap. It usually takes some other catalyst, some reason to believe that the tide is going to turn in a more positive direction, to get share prices moving, and that could be problematic for ArcelorMittal in the near term. While I believe management is running the business along generally sound lines, weakness in Europe and emerging concerns about the U.S. market are likely to stick around a bit longer and ArcelorMittal really needs some beat-and-raise quarters coupled with a stronger steel market to change sentiment.

Click here for more:
ArcelorMittal Lagging On Weaker Markets And Margins

Nucor Has The Right Mix And A Better Valuation

I wasn’t a big fan of Nucor (NUE) back in February, and I don’t feel like I’ve missed out on anything with the 10% move down since then. While Nucor remains one of the best operators in the steel business, prices have weakened as I expected and volume hasn’t made up the difference. What’s worse, costs are rising and I think companies in the steel sector may be counting on more volume/demand recovery in the U.S. than the economy can support.

With the downward move the shares are more interesting now. I still prefer Steel Dynamics (STLD) and Ternium (TX) (though the shares of the latter have been quite weak since February), but Nucor does seem to offer some upside on my EV/EBITDA valuation approach, and Nucor should benefit from oncoming volume/capacity increases in a still-healthy market while others are now investing for capacity that won’t come into play for years.

Read more here:
Nucor Has The Right Mix And A Better Valuation

Nucor Has The Right Mix, But Will The Market Cooperate?

I continue to prefer Steel Dynamics (STLD) among U.S. steelmakers, but Nucor (NUE) has been the better performer over the past year (they're tied over the last two years, and STLD wins the five-yr comp), and the shares are up about 15% since the Christmas Eve 52-week low on renewed enthusiasm over better steel demand and pricing in 2019. I do like Nucor's comparatively stronger leverage to long products and plate (where I think prices will be noticeably better in 2019 relative to hot-rolled coil), but I think investors will need to wait until 2021/22 to see year-over-year growth in EBITDA again (on a full-year basis), and I see more that can go wrong with pricing and demand at this point than what can go right.

Read more here:
Nucor Has The Right Mix, But Will The Market Cooperate?

Steel's Uncertain Outlook Certainly Complicates The Steel Dynamics Story

Steel Dynamics (STLD) continues to operate well in an increasingly challenging market, and I am relatively bullish on the quality of the management, the quality of the company, and the prospect for improving market share and valued-added mix to help offset some of the mounting challenges the sector is facing.

Cyclical stocks are always challenging to value, and I find that particularly true when the cycle starts to roll over. The market generally prices stocks in sectors like steel on the basis of next year’s EBITDA, but that gets tricky when you realize that the next year’s EBITDA is likely to be lower than this year’s, and the next, and so on. Looking at several different approaches, I think a mid-$30’s to low $40’s fair value is still valid and reasonable, but 2019 may still have some unwelcome surprises for the industry if demand starts to flag.

Click here for more:
Steel's Uncertain Outlook Certainly Complicates The Steel Dynamics Story

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.

Continue here:
Acerniox Waiting For The Cavalry To Show Up

Gerdau Looking Toward Better Results

Brazil’s Gerdau (GGB) offers a curious investment proposition today. Although the shares have lagged Ternium (TX) over the past three months, Gerdau has been the best-performing steel stock of the group I follow closely, and by a fairly wide margin (outperforming #2 Ternium by close to 15%). Gerdau is also one of the few steel companies/stocks where there is basically a unanimous expectation of EBITDA heading higher for the next two to three years, largely on the back of an expected recovery in Brazil.

Metal spreads may well have peaked in the U.S. (where Gerdau generates close to a third of its EBITDA), but volume demand growth is expected to continue and Gerdau has under-utilized capacity it can bring into action. What’s more, spreads in Brazil could still improve and Gerdau is still reaping the cost savings benefits of digital investments. Gerdau’s valuation doesn’t scream “bargain”, but in the real world of stock performance, this is still a name to consider given its potential for further upward earnings revisions and its capacity to grow at a time when many peers will see earnings contraction.

Read more here:
Gerdau Looking Toward Better Results

ArcelorMittal Has Continued To Skid On Cycle And Capital Allocation Worries

Some of the best spreads in recent memory haven’t been much help to the steel sector over the past year, and now it looks like the cycle is meaningfully slowing down. With steel prices declining around the globe, apparent demand softening, and growing worries about expanding capacity, coupled with shrinking spreads and sell-side forecasts for declining EBITDA, it doesn’t look like a particularly healthy set-up for ArcelorMittal (MT).

I wasn’t bullish on ArcelorMittal back in September, even though the shares “looked cheap” by multiple metrics, and the shares have fallen nearly another 30% since then. I still can’t really bring myself to want to own these shares myself, even though once again the valuation seems harsh by most metrics I can evaluate.

Read the full article here:
ArcelorMittal Has Continued To Skid On Cycle And Capital Allocation Worries

Despite A Host Of Challenges, Ternium Is Holding Up

Predicting how investors will react to particular pieces of news can be difficult, and I look at Mexico’s Ternium (TX) as a case in point. You might think that weak demand in Mexico, an ugly situation in Argentina, and a struggling rebound in Brazil would all be pressuring the stock, not to mention the announcement that Steel Dynamics (STLD) is planning to build a large (3Mtpa) plant that will export to Mexico, would pressure the stock, but Ternium has held up better than many others in the steel sector, including Steel Dynamics, Nucor (NUE), POSCO (PKX), and ArcelorMittal (MT).

Even with this recent run of better (or at least “not as bad”) performance, the shares don’t look expensive. While the pricing concerns that trouble me with Nucor and Steel Dynamics do apply here as well, as does the concern about buying shares into what is likely to be declining EBITDA, I believe Ternium could return to growth sooner and that valuation is even less demanding.

Click here for more:
Despite A Host Of Challenges, Ternium Is Holding Up