Steel Producers Continue Their Slow Grind Back to Health

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The steel industry is fighting a long, hard battle in the aftermath of the worst recession since the Great Depression. As the financial crisis set in, demand for everything that counts steel as an input collapsed, and took the major steelmakers to the brink of insolvency.

Fast forward to today, and the recent results from the world’s major steel companies underscores the remaining challenges facing the global economy. Demand continues to be sluggish, and the frustratingly slow economic recovery means steelmakers are still struggling. That being said, are there any long-term opportunities to be had from steel?

One of the world’s comeback industries

International steel powerhouse ArcelorMittal (NYSE: MT) is an interesting choice. As it was for the global economy, 2012 proved to be an extremely difficult year for ArcelorMittal. The company reported a $3.7 billion net loss, driven primarily by a 2.3% drop in steel shipments.

That being said, management is more optimistic about this year than last. The company expects reported earnings before interest, taxes, depreciation, and amortization (EBITDA) to be higher in 2013 as compared to 2012. In addition, steel shipments are expected to increase by 2% to 3%, and margins are expected to improve, as well.

Moreover, ArcelorMittal’s struggles are well reflected in the stock price. The company trades at mult-year lows. Its shares currently sit around $11 per share, and the stock trades for just 40% of book value.

A domestic steel producer with more resilient underlying results is Nucor (NYSE: NUE), which many investors likely know for its dividend track record. To the company’s credit, Nucor navigated the financial crisis much better than its rivals. Late last year, Nucor increased its dividend for the 40th year in a row. Nucor has raised its dividend every year since it first began paying dividends in 1973.

Unfortunately, Nucor is struggling right alongside its peers. The company's first-quarter results were unimpressive, with sales dropping 10% year over year.

Fellow U.S. steel maker United States Steel (NYSE: X) has struggled mightily since the financial crisis, seeing its shares plunge from $184 per share in 2008 to its current level of $18 per share.

The company’s sales and profits collapsed during the financial crisis and are still struggling to recover. Sales held up modestly well in a difficult 2012, dropping 2.7% year over year, but the company’s net loss more than doubled to $0.86 per diluted share.

The company’s troubles extended into its fiscal first quarter, as it reported a net loss of $0.51 per share.

You’ll need nerves of steel

When I last visited steel stocks nearly two months ago, I took a cautious view on the sector in light of the ever-present struggles facing the industry. Since then, each of these stocks has continued to decline. While it’s rarely wise to try to time markets, at some point the bearish raid on steel stocks will have to end. These stocks trade for fractions of book value, and even though they are struggling to maintain profitability, the selling can’t continue forever.

Our society needs steel, as it is a basic material and a vital component of our infrastructure. Sooner or later, the global economy will recover and the world will find itself on much stronger financial footing. Investors should fully expect continued near-term volatility, but for someone willing to take a very long-term view, steel stocks may present a good opportunity after such a punishing sell-off.

In particular, Nucor looks to be one of the best managed, conservatively run steel stocks on the market. The company’s solid 3.4% dividend will pay investors willing to wait for the re-emergence of the steel industry. Moreover, the company has a long track record of raising its dividend, albeit at low rates. As a result, I’d recommend investors give preference to Nucor among the steel stocks.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Nucor. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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