The US Steel Industry Is Concerned
Vanina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The US steel market is facing headwinds due to low metal prices. There are many factors that could be causing this issue such as the declining prices of raw materials, all of which impact steel production. On the other hand, increased imports of Chinese steel into US is another reason of concern for these companies.
Despite these issues, investors can still find good opportunities and enter this market. The construction sector has been recovering and this could be advantageous for the steel industry. Let's take a look at the very competitive steel business.
The global steel king
ArcelorMittal (NYSE: MT), with its vertical integration and high degree of operating leverage, is well-positioned relative to other steelmakers. The main concern about the company is that most of its production is destined to the sluggish European market. That said, ArcelorMittal has arguments to show a little recovery.
The company has already beaten its guidance and has reaffirmed its expectations to beat its net debt guidance too. Consequently, covenant breaches have disappeared and have lowered the risk premium related to the stock.
ArcelorMittal is currently trading at 6.4 times the ratio of its enterprise value to its earnings before interest, taxes, depreciation and amortization (EV/EBITDA) for 2013 and 4.2 times its EV/EBITDA for 2014. Even if only a small share of the company's EBITDA (around 7%) comes from the US, I think that ArcelorMittal (which trades at 33% of its book value) represents a long-term opportunity for those looking for exposure to the global steel market.
A leveraged US steel bet
United States Steel (NYSE: X) has proven to be one of the leading pack. In the US, the company has achieved an 80% self-sufficiency in coke and almost completely in iron ore. This vertical integration gives the company a cost advantage over its competitors as it sources the majority of its raw materials at cost and mitigates cost volatility, a winning card these days.
The company, with a net debt to EBITDA ratio of 4.6 times, is a leveraged play within the US steel industry. The company’s fundamentals are ameliorating fast and there are positive points that should be highlighted.
The key aspect for this company is its European profitability, which has showed significant improvement (reaching its highest level since 2010.) US Steel also paid the majority of its convertible notes due in 2014 and increased its liquidity to $2.5 billion. The company is currently trading at 8 times EV/EBITDA for 2013, but analysts expect the company to increase its earnings for 2014. This stock is the right bet for those who are looking for a risky US stock.
Nucor: The safest company
Nucor (NYSE: NUE) is the largest US steel manufacturer by production, and its mills are among the most modern and efficient in the world. Being the profitability champion within the steel sector, Nucor is investing for future growth. The company has invested $800 million of its 2013 capital expenditure target without incurring in the dangerous leverage that characterizes the steel industry. With a net debt to EBITDA ratio of 1.75 times, the company has a very strong balance sheet.
Even if Nucor trades at a premium to its peers, the premium is more than justified. The company is the safest bet within an industry that has been operating under pressure for many years. As a matter of fact, it is the only company within this group of three that has been consistently making money since the 2009 crisis. Nucor is trading at 10.3 times its EV/EBITDA for 2013 and a price-to-earnings ratio of 24 times, which is well above its peer group.
Although the steel market is experiencing some difficulties, I think that there is a good opportunity for the future. The companies analysed above have different types of risks and rewards. For those looking for a global exposure to steel prices, ArcelorMittal might be a good option. For those looking for a safe and US-focused stock, Nucor is the answer. Meanwhile, investors looking for a healthy balance sheet at a premium price should go for US Steel.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Vanina Egea 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!