Steel Getting Stronger in the U.S.

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As I have mentioned before, I am long AK Steel (NYSE: AKS). I will stay long because I think there are enough reasons to think the steel sector in the U.S. is set to outperform the overall market going forward. The U.S. economy is already growing, and the construction and automotive sectors are set to be drivers of this growth.

The analysts at my research company (www.lonetreeanalytics.com) estimate that the U.S. economy will grow by 2.3% in 2013 and again by 2.4% next year. Let's review three stocks you should consider.

AK Steel, pure leverage

AK Steel is my top pick. The reason? It's the most leveraged company within the steel space in the U.S. The company recently released first-quarter results and its loss was below what analysts expected. AK Steel reported a first-quarter loss of $0.07 per share as against company guidance (from March 22) of a loss between $0.09 and $0.13. The company's adjusted EBITDA was $66.8 million. 

Even if the beat primarily came from lower operating costs, which benefited from lower raw material costs (iron ore, coal, scrap, coke) and even if steel pricing trends have been weaker so far, I believe in the long-term earnings power of AK Steel. Its focus on the automotive industry and its $1.05 billion liquidity make me a bullish on the company. AK Steel, which has a 2013 net debt to EBITDA of 4.3x, trades at 2013 5.1x EV/EBITDA and 2014 3.9x EV/EBITDA.

United States Steel, waiting for 2014

United States Steel (NYSE: X) is a more conservative (less leveraged) play, but still a good option for those who are looking for some leveraged exposure to the steel market and the housing revival. U.S. Steel's first-quarter results disappointed almost all investors, but 2014 should be a good year.  

Even if the lower second-quarter guidance didn't surprise any well informed analyst, the magnitude of the sequential decline was more than what was expected. However, there were some positives, such as: A) The tubular business was much better than I had expected, B) The European side of the business (unexpectedly) improved, and C) U.S. Steel's liquidity position improved (by $2.5 billion), with another quarter of positive free cash flow.

The steel market is currently very tough, but the company's shares already reflect this. U.S. Steel's shares trade near their 52-week low, and at 2013 7.9x EV/EBITDA and 2014 4.8x EV/EBITDA, I am a bull on the stock.

High quality deserves a price premium 

Nucor (NYSE: NUE) is the best steel company you will find in the U.S. Its top quality balance sheet makes it safe and stable. Nucor is an eternal candidate to acquire other company's assets, and its strong un-leveraged balance sheet is always ready to be used if opportunities arise.

Even when the company has seen only a marginal demand improvement across each of its products (except sheet, which remains weak) I am sure of its upside potential. As it almost always does, Nucor did beat expectations in the first quarter of this year. The company reported EPS of $0.26 versus a consensus of $0.25.  

Besides, Nucor expects some improvement in Q2 earnings, but we shall not see a real change in earnings until 2014. The company, which remains cautiously optimistic about non-residential construction (which is ameliorating fast), trades at 2013 10x EV/EBITDA and 2014 6x EV/EBITDA. Its EV/EBITDA multiple is higher than U.S. Steel and AK Steel, but the company is not only making money (its net income is positive), but also paying a generous 3.4% cash dividend yield.

 Bottom line

The three companies mentioned above will benefit from the recovery, particularly from the housing and automotive recovery. You should choose them thinking of your risk aversion level. The more leveraged plays will have more upside if things go right, but much more downside if reality goes against you. Time shall say, I have already made my bet.

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Federico Zaldua owns shares of AK Steel. The Motley Fool recommends Nucor. 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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