The Zacks Steel Producers industry has staged a strong rebound after being hobbled by the fallout from the coronavirus pandemic, thanks to a strong revival in demand across major steel-consuming industries and a rally in steel prices. Solid demand for steel in the key end-markets such as automotive and construction represents a tailwind for the industry. Favorable steel prices should also drive the profitability of the industry players. Gerdau S.A. GGB, Commercial Metals Company CMC, Olympic Steel, Inc. ZEUS and Universal Stainless & Alloy Products, Inc. USAP are well placed to gain from these trends.
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 set 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 a resumption of operations across major steel-consuming sectors following the easing of lockdowns and restrictions across the world. The recovery in the automotive industry is being driven by strong customer demand. Steel makers are expected to benefit from higher-order booking from the automotive market in 2022 as the semiconductor crisis gradually eases and automakers ramp up production following a slowdown in 2021. The construction sector has also bounced back on the heels of a resumption of projects that were stalled due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient. Steelmakers are also seeing a demand recovery in the energy space on higher activities resulting from a surge in oil and natural gas prices. Favorable trends across major markets augur well for steel demand over the near term. Still-Elevated Steel Prices to Drive Margins: Steel prices witnessed an unprecedented surge in 2021 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 staged a strong recovery and hit record levels 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 on the back of a mismatch between supply and demand. However, prices have come under pressure since the beginning of the fourth quarter of 2021, partly due to rising production levels. HRC prices have cooled off since October after peaking in September 2021, dragged down by shorter lead times and rising supply. Despite the sharp correction from its peak levels, HRC prices remain elevated compared with the historic levels. As such, favorable prices are expected to drive profitability and cash flows of steel-producing companies going forward. Slowdown in China’s Steel Demand 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 slowdown in construction and manufacturing activities has led to the contraction in demand for steel in China. Manufacturing is being hurt by semiconductor shortages, supply chain disruptions and power outages. 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. The debt crisis at one of China’s top property developers, Evergrande, also increases the risk of a financial contagion in the country’s property sector. The slowdown in the domestic real estate sector is expected to hurt steel demand in China this year.
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 #42, which places it at the top 17% 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 Outperforms Sector and S&P 500
The Zacks Steel Producers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year. The industry has gained 22.7% over this period compared with the S&P 500’s rise of 10.8% and the broader sector’s decline of 0.2%.
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 4.18X, below the S&P 500’s 13.98X and the sector’s 6.09X. Over the past five years, the industry has traded as high as 12.52X, as low as 3.69X and at the median of 7.62X, as the chart below shows.
4 Steel Producers Stocks to Keep a Close Eye on
Commercial Metals: Texas-based Commercial Metals, sporting a Zacks Rank #1 (Strong Buy), manufactures, recycles and markets steel and metal products, related materials and services. It is gaining from robust steel demand, driven by elevated spending on the residential and construction sector in North America and recovery in the manufacturing sector. It continues to witness stellar demand for steel products across most end markets. In North America, the company is gaining from strong rebar demand, supported by solid construction growth and robust merchant bar and wire rod demand. Strength across the key end markets in both North America and Europe is supporting solid steel sales volumes. 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. You can see the complete list of today’s Zacks #1 Rank stocks here. Commercial Metals has expected earnings growth of 62% for the current fiscal year. The Zacks Consensus Estimate for the current fiscal-year earnings for CMC has been revised 22.7% 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 13.1%.
Gerdau: Brazil-based Gerdau, carrying a Zacks Rank #2 (Buy), is a leading producer of long steel in the Americas and one of the biggest global suppliers of special steel. It is benefiting from healthy demand for steel in its key operations, which is supporting its volumes. A recovery in major consumer sectors is driving its steel shipments. The strong performance of the construction industry in Brazil and the United States along with higher global steel prices are also driving its margins. The company is seeing higher production and shipments in its Brazil and North America business divisions on higher demand from the construction and industrial sectors. A recovery in light vehicle production in Brazil and the United States, along with the healthy performance of the heavy vehicle sector in Brazil is also supporting volumes in its Special Steel division. GGB is also gaining from a gradual recovery in demand from the oil and gas industry. The consensus estimate for the current-year earnings for Gerdau has been revised 13.9% upward over the last 60 days. It has a trailing four-quarter earnings surprise of roughly 21.9%, on average. GGB also has an expected long-term earnings per share growth rate of 21.5%.
Olympic Steel: Ohio-based Olympic Steel, carrying a Zacks Rank #2, 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 1.7% 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 49.7%.
Universal Stainless & Alloy Products: Pennsylvania-based Universal Stainless & Alloy Products, carrying a Zacks Rank #2, makes and markets finished and semi-finished specialty steels, including stainless steel, tool steels and other alloy steels. The company is benefiting from strengthening demand in the aerospace market, which is driving its premium alloy sales and the top line. USAP is seeing strong growth in aerospace sales as demand for new airplanes is being driven by a recovery in air travel and higher demand for business jets and freighters. A rebound in industrial businesses is also contributing to a pickup in its heavy equipment sales. Higher drilling activities on the back of a spike in oil and natural gas prices are also driving sales in the oil and gas market. The company is also gaining from higher production levels and pricing actions to offset cost inflation. Universal Stainless & Alloy Products has an expected earnings growth rate of 88.9% for the current year. USAP has a trailing four-quarter earnings surprise of roughly 2.6%, on average.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Gerdau S.A. (GGB) : Free Stock Analysis Report Commercial Metals Company (CMC) : Free Stock Analysis Report Universal Stainless & Alloy Products, Inc. (USAP) : Free Stock Analysis Report Olympic Steel, Inc. (ZEUS) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research
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