Seeking Value in Steel Stocks
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite their recent rally in the last couple of days, I still find steel stocks to be deeply undervalued. Steel remains to be the key driver of the world’s economy. According to world steel association, more than four million people are employed in the steel industry with another two million in related supporting industries. The metal touches every aspect of our lives since no other material comes close to having the same unique combination of strength and versatility.
- Approximately 200 billion cans of food are produced each year from it, which allow consumers to also save on energy since no refrigeration is necessary.
- Over 320 million PCs were sold in 2010 with estimated 25% of an average computer made out of steel parts.
From skyscrapers to surgical safety equipment, steel is pretty much everywhere in our life. With the housing and construction sector being the largest consumer of steel today, it is no wonder why the prices have been rather lackluster. Currently I see steel stocks hovering in the oversold levels. Take a look at the option activity brewing in US Steel (NYSE: X) as it finally broke the $20 resistance level with strong volume. Approximately 11,500 July call contracts were traded yesterday at a $22 strike price as confidence surged back into the stock.
In its domestic operations, U.S. Steel benefits from a raw material cost advantage than some of its rivals like Nucor Corp. and Steel Dynamics. Unfunded pension and health care liabilities of $5 billion continue to weigh in on the stock as well as its exposure to the highly cyclical industries of auto and construction. Aided by a higher volume and revenue per ton, US Steel should see increased profits for the remainder of the year. In addition, if drilling activities pick up for oil and gas industries, the demand for oil country tubular goods will also rise, cushioning X’s revenue stream.
Arcelor Mittal (NYSE: MT) is another stock that is showing bullish momentum. This Luxembourg-based steel giant has tumbled from its high of $22 since the beginning of 2012. MT is caught in a very interesting predicament. On one hand they have their suppliers BHP Billiton Ltd., Vale SA, Rio Tinto - an oligopoly of iron-ore producers that have tremendous pricing power. And on another hand they’re pressed against the wall in their inability to pass on the higher input costs to one of its largest customers, Volkswagen AG.
What is the solution?
Arcelor Mittal is now acquiring and building its own supply of iron ore and mines in Canada, Liberia and Brazil to significantly reduce its dependency from its suppliers. It is forecasted that MT will produce nearly 100 million tons by year 2015, which is an increase from 54 million tons of last year's production.
Another security that is attracting bottom feeders is AK Steel (NYSE: AKS). With its 3.75% current dividend yield and a price of $5.34, AKS is deeply undervalued. I’ve completely ignored Goldman Sach’s 6 mo. price target of $5 that the stock reached in about 48 hours. Rumor has it that AK Steel’s 65% value loss makes it a prime takeover target, but these rumors are speculated on almost all the stocks that lose a significant portion of their value within a short period of time. AKS stands out as it also has a different client base; it produces flat-rolled carbon, stainless and electrical steels for electrical power generation and distribution markets. Some noteworthy company specific risk for AK Steel is its high ratio of total liabilities to assets versus some of its peers.
Global sales for steel totaled nearly a trillion dollars in 2010. Prior to a severe downturn of the steel industry in 1998, the U.S. market was very disjointed and plagued with cost-cutting. After a series of mergers and acquisitions, the steel market has been much more concentrated. With stronger demand pulling from the auto industry, I do find value in steel as I see companies incrementally regaining their lost pricing power, if and when housing begins to recover faster.
edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
