3 Steel & Iron Stocks to Buy Now
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If you are bullish on the global macroeconomy, I strongly encourage backing steel & iron producers. They have been slammed in recent years from a slower-than-expected recovery, and the result is that many stocks are trading significantly below intrinsic value. As the economy picks back up and is strengthened by stimulus spending here and abroad (particularly in emerging markets), we should see strong stock price appreciation.
ArcelorMittal's (NYSE: MT) Reward > Risk
In terms of risk, steel has never been a stable industry. ArcelorMittal, which has seen misses in 3 of the last 5 quarters, is certainly no exception to this rule. Misses of 53% (3Q 2011) and 59% (1Q 2012) were in marked contrast to results that were 90% (4Q 2011) and 94% (2Q 2012) better than expected. The producer now trades at 8.5x forward earnings, despite being forecasted for 26.4% annual EPS growth over the next 5 years. Margin expansion and the price target of $23.29 all support my bullish outlook.
There are several reasons to be bullish on the stock. For one, the company's vertical integration creates an efficient cost structure that maximizes return on investments. Second, by expanding into emerging markets the company reduces labor risk at the same time that it increases exposure to ground demand. I also believe that analysts have been overly bearish about Chinese growth slowing. The reality is a bit more complicated, but the Chinese stimulus package should increase infrastructure spending to offset any weakening consumer demand.
With a 4.6% dividend yield, management is also committed to returning free cash flow to shareholders. Debt-to-equity is healthy at less than 0.5x, so I do not foresee any pressure on the capital allocation policy. From a buyout or asset sale perspective, the parts are worth more than the whole given the price-to-book ratio of 0.46x.
Vale and Gerdau are two oil, steel, and iron producers I recommend considering. Vale trades at a respective 6.1x and 6.6x past and forward earnings, versus corresponding figures of 16.1x and 7.8x for Gerdau. With around double the volatility of the broader market, Gerdau carries a significant degree of risk that will likely generate outperformance should earnings fare better than expected.
Fortunately, Gerdau's earnings performance has been less "on and off" than ArcelorMittal's has been over the past 5 quarters. 2Q 2012 performance was three times better analyst expectations, yet the stock has gone virtually nowhere over the past 6 months. While debt is fairly high at a current ratio of 2.2x and free cash flow has entered negative territory, the firm is overly cheap against its historical 14.4x 5-year average PE multiple.
Good news from Vale also signals a turnaround in steel & iron. 3Q iron ore production sequentially picked up 4.2% for the producer, as nearly 84 million tons were brought to the market. An iron ore spot price increase of 30% in China further indicates strong future fundamentals. Beijing recently said that it will invest $156 billion in infrastructure - a tailwind that has yet to be factored into projected growth curve for firms like Vale.
On the other hand, Brazil has put pressure on the firm to expand beyond its core iron market as a way of supporting governmental policy. This is not nearly as bad as investors have made out, since it will end up strengthening Vale's connections with governmental control of an emerging market - something that domestic producers cannot do both from a practical and legal standpoint.
TakeoverAnalyst 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.