Why Steel Could Continue to Post Massive Gains All Through 2018

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The upswing in construction and the beginning of what could be the biggest infrastructure projects in the United States since the 1950s have provided the steel industry with a very positive performance profile over the last year. Steel pricing is substantially higher, and many of the mills are not expected to realize the increases until later this year in the second and third quarter. With results from the big companies starting to come out Wednesday after the close, investors have a chance to buy shares in front of the first-quarter numbers.

A new Deutsche Bank research report on the steel industry makes the case that not only could the first quarter be solid, but also subsequent quarters as well. The report said this:

It is worth noting that despite strong spot steel pricing (Hot rolled coil up ~20% year over year on average), sector EBITDA is only expected to increase ~4% year over year, due to a lagged effect of contracts, product mix (cold rolled steel up at a lower rate of ~8% year over year) and higher input costs (scrap, electrode, energy). However, net income is expected to increase 28% year over year to $811 million due to improved results expected from US Steel and the benefit of recent tax reform. Overall Net Debt is forecast to decline modestly (-2% quarter over quarter) to $10.6 billion. Focus expected to be mainly on management’s view on Section 232 and the impact of country exemptions/possible product exclusions, end-markets outlook as well as customer feedback post recent price hikes, and raw material cost pressures (namely scrap).

The Deutsche Bank analysts are very positive on four companies, and all four are rated Buy.

Nucor

This top steel company should do very well if the economy sees a continued solid pickup this year and the administration’s infrastructure push comes to the forefront. Nucor Corp. (NYSE: NUE) is one of North America’s largest steel producers, with almost 27 million tons of finished steel capacity at 23 mini-mills throughout the United States. The company’s downstream steel products business includes rebar fabrication, steel joists/deck, cold finished bars, fasteners, building systems and wire mesh. Nucor also has 5 million tons of scrap processing capacity.

Nucor has always kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially if a huge infrastructure build-out becomes a reality. Some think that continued demand from the rebuilding of large parts of Houston after Hurricane Harvey and storm damage in Florida is also be a positive that has carried into 2018.

Nucor investors are paid a very solid 2.37% dividend. The Deutsche Bank price target is for the shares is $76. That compares with the Wall Street consensus target of $75.36 and the recent share price of $65.15.

Reliance Steel & Aluminum

Deutsche Bank is positive on this top service center play. Reliance Steel & Aluminum Co. (NYSE: RS) provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products. Its primary processing services comprise cutting, leveling, sawing, machining and electropolishing.

The company also fabricates and distributes structural steel components and parts; provides metal components and inventory management services; and distributes alloy, carbon and stainless steel bar and plate products, as well as steel and nonferrous and aerospace metals, including aluminum, steel, titanium, nickel alloys and aluminum bronze, offering full or cut to size materials.

Reliance is the largest metals service center company in North America, operating in more than 200 locations. About half of its business is warehousing and the other half involves some sort of value-add processing or fabricating. Non-ferrous volume comprises about 30% of its annual shipments. The company tends to sell small spot-priced tons to customers, the majority requiring delivery within 24 hours.

Shareholders receive a solid 2.26% dividend. Deutsche Bank has a $98 price target on the stock, while the posted consensus target is $99.92. The stock traded early Wednesday at $89.90 a share.