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Near-Term Outlook Appears Bleak for Steel Producers' Stocks

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The Zacks Steel Producers industry consists of producers of a wide range of steel products for a number of end-use industries including automotive, construction, appliance, container, industrial machinery, transportation, and oil and gas. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products.

Here are the industry’s three major themes:

  • Waning steel demand poses problems for steel producers. A slowing Chinese economy amid lingering trade conflict with the United States has triggered a slowdown in steel demand in China, the world’s top consumer. The trade war has taken a huge toll on China as reflected by its tepid economic indicators. Signs of weakness across the country’s major steel end-use markets — construction and automotive — as reflected by a slowdown in real-estate investment growth and falling car sales have clouded steel the demand outlook.
     
  • The industry continues to reel under the effects of sustained oversupply of steel in the market, exacerbated by continued growth in production in China. Notwithstanding the U.S.-China trade tensions, China’s steel mills continue to crank up output. A glut of cheap Chinese steel has put downward pressure on both Chinese and global steel prices. China’s steel overcapacity remains an overhang for the industry.
     
  • The 25% tariff on steel imports, which the Trump administration levied last year, drove up production capacity of U.S. steel producers. Improved capacity also provided a boost to U.S. steel production. However, higher production, partly driven by restarted mills, has contributed to the sharp decline in U.S. steel prices this year. In fact, after rallying to multi-year highs on the back of the Trump administration’s imposition of tariffs, U.S. steel prices have now fallen back to the levels seen prior to the tariff announcement. Sliding steel prices, softening demand across major domestic end-markets and trade tensions have weighed on U.S. steel producers this year. While some of these producers have recently taken steps to reduce capacity in the wake of declining domestic steel prices, the move is not expected to result in a significant recovery in prices anytime soon given the oversupply in the market and weak domestic steel demand.


Zacks Industry Rank Indicates Dim Prospects

The Zacks Steel Producers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #172, which places it at the bottom 33% 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 a gloomy near term. 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.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 61.1%.

Before we present a few steel producers stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Lags S&P 500 & Sector

The Zacks Steel Producers industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials Sector over the past year.

The industry has declined 36.5% over this period compared with the S&P 500’s decline of 0.5% and broader sector’s decline of 16.2%.

One-Year Price Performance

 



 

Industry’s Current Valuation

On the basis of 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 5.65X, below the S&P 500’s 10.89X and the sector’s 8.68X.

Over the past five years, the industry has traded as high as 9.56X, as low as 5.15X and at the median of 7.60X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Enterprise Value/EBITDA (EV/EBITDA) Ratio





 

Bottom Line

The steel producers industry remains hamstrung by sustained overcapacity, driven by continued growth in Chinese production. Sino-U.S. trade tensions also pose as headwinds to the industry. A weakening Chinese economy amid trade war has triggered a slowdown in steel demand in China. Falling U.S. steel prices are also hurting American steel producers.

Here, we present one stock sporting a Zacks Rank #1 (Strong Buy) and two stocks carrying a Zacks Rank #2 (Buy) that are well positioned to gain amid the prevailing challenges. There is also another stock with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

L.B. Foster Company (FSTR - Free Report) : The Pennsylvania-based company, sporting a Zacks Rank #1, has an expected earnings growth of 86.3% for the current year. The consensus EPS estimate has moved 12.4% higher for the current year, over the last 60 days.

Price and Consensus: FSTR

 



 

Commercial Metals Company (CMC - Free Report) : The Texas-based company currently carries a Zacks Rank #2. It has an expected earnings growth of 36.9% for the current year. The company delivered an average positive earnings surprise of 8.3% in the trailing four quarters. The consensus EPS estimate has moved 1% higher for the current year, over the last 60 days.

Price and Consensus: CMC

 



 

Shiloh Industries, Inc. (SHLO - Free Report) : The consensus EPS estimate for this Ohio-based company has moved 50% higher for the current year, over the last 60 days. The stock, carrying a Zacks Rank #2, has also delivered an average positive earnings surprise of 535.4% in the trailing four quarters.

Price and Consensus: SHLO

 



 

Nucor Corporation (NUE - Free Report) : The North Carolina-based company, carrying a Zacks Rank #3, delivered an average positive earnings surprise of 2.6% in the trailing four quarters. The company also has an estimated long-term earnings growth rate of 12%, higher than the industry average of 7.5%.

Price and Consensus: NUE

 

 

 

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