An electric arc furnace at Nucor, which is among the steelmakers that could be worth far more as demand grows.
Courtesy of Nucor
The steel industry is enjoying unprecedented prosperity, as steel prices have nearly quadrupled in the past year to $1,900 a ton. Yet steel stocks sport some of the market’s lowest valuations. Leading companies such as Nucor , Cleveland-Cliffs , United States Steel , and Steel Dynamics trade for two to five times 2021 estimated earnings. They could be worth far more as steel demand grows.
“We’re seeing a rebirth of the U.S. steel industry,” says Curt Woodworth, a steel analyst at Credit Suisse. “The industry is healthier than it has ever been, profitability is at an all-time high, balance sheets are in their best shape in a long time. The stocks are greatly undervalued.”
Cleveland-Cliffs (ticker: CLF) expects to be debt-free in 2022, and U.S. Steel (X) is moving in that direction. U.S. Steel also has a fully funded employee pension and retiree healthcare plan. The industry’s improving financial condition could lead to higher dividends and a loftier valuation.
Steel stocks are up sharply this year, but down an average of 20% from their August highs. Investors worry that steel prices will collapse in 2022 as new supply enters the market. They also want steel makers to ramp up dividends and stock buybacks, as other commodities producers have done.
Woodworth argues that prices will stay higher for longer and that consensus earnings estimates for 2022 are too low. He assumes an average price of $1,200 a ton for 2022, with the market discounting $800 or lower.
Heavy Metal
Here’s how some of the top North American steel makers stack up.
| Company / Ticker | Recent Price | YTD Change | 2021E EPS | 2022E EPS | 2021E P/E | 2022E P/E | Dividend Yield | Market Value (bil) |
|---|---|---|---|---|---|---|---|---|
| Cleveland-Cliffs/CLF | $19.88 | 37% | $5.93 | $3.66 | 3.4 | 5.4 | None | $10.2 |
| Nucor/NUE | 99.97 | 88 | 21.19 | 12.86 | 4.7 | 7.8 | 1.6% | 30.2 |
| Steel Dynamics/STLD | 60.18 | 63 | 14.19 | 9.42 | 4.2 | 6.4 | 1.7 | 12.6 |
| Stelco Holdings/STZHF | 29.53 | 66 | 15.42 | 7.86 | 1.9 | 3.8 | 2.1 | 2.4 |
| U.S. Steel/X | 21.82 | 30 | 13.19 | 6.40 | 1.7 | 3.5 | 0.2 | 6.1 |
E=estimate
Source: FactSet
Woodworth says investors are overlooking several positives. The growth in U.S. steel demand is likely to average 3% to 4% annually in coming years, he estimates. North American auto production could increase next year as chip shortages ease. More infrastructure spending and the buildout of renewable sources of electricity, especially steel-intensive wind turbines and related transmission lines, all bode well.
U.S. steel makers are the cleanest in the world because 70% of domestic production comes from lower-emission mini-mills that use scrap. Steel’s green tint may solidify political support for current tariffs of 25% on many imports, which account for about 20% of the market.
Formerly a producer of iron ore, Cleveland-Cliffs is now a major steel maker, following two acquisitions last year. It has a shareholder-oriented CEO in Brazil-born Lourenco Goncalves, who owns $100 million of its stock. At around $20, Cleveland-Cliffs stock trades for 3.4 times projected 2021 earnings of nearly $6 a share.
“The company bought two steel makers at the bottom of the market and is a prudent allocator of capital,” says Michael Glick, a steel analyst at J.P. Morgan. He has an Overweight rating and a $40 price target. Cleveland-Cliffs has been noncommittal about capital returns, but buybacks and the initiation of a dividend are possible in the coming year.
U.S. Steel bought an attractive mini-mill operator, Big River Steel, and sold noncore assets while using its current windfall to cut debt. But its plan to spend $3 billion on a new mini-mill didn’t thrill investors, as it could delay meaningful capital returns. U.S. Steel trades at $22, or under two times projected 2021 earnings. Woodworth has a price target of $49.
Industry leader Nucor, an operator of mini-mills, has been consistently profitable in recent years. The company has a strong balance sheet with net debt of under $3 billion, and it aims to return at least 40% of its net income to holders via dividends and stock buybacks. Given its product mix, it should be a beneficiary of an infrastructure bill. The shares, at around $100, trade for under five times this year’s estimated earnings and yield 1.6%.
Steel Dynamics (STLD), founded by Nucor alumni, is a leader in environmental sustainability. Its greenhouse-gas emissions are 70% below the industry average. The shares trade around $60, or for four times projected 2021 earnings of $14 a share, and yield 1.7%. The company expects to earn almost $5 a share in the third quarter.
Steel Dynamics should benefit from the opening of a new mill in the fourth quarter. “It’s basically done with major capital expenditures,” says Glick, who predicts a higher dividend and has an Overweight rating, with a price target of $104.
Stelco Holdings , the Canadian steelmaker, has lightly traded U.S. shares (STZHF) that fetch about $30 on the Pink Sheets. The company has a large, upgraded blast furnace on the shores of Lake Erie that has helped make it one of lowest-cost North American producers, at $400 a ton. It has net cash and a well-regarded CEO in Alan Kestenbaum, who owns 11% of the stock.
“We have an incredible cost advantage and the highest margins in the industry,” Kestenbaum says.
Shares trade for two times this year’s expected earnings. Stelco bought back 13% of its stock from a large holder in August and doubled its quarterly dividend to 20 Canadian cents a share, for a current yield of 2%.
Write to Andrew Bary at [email protected]
