Last week, I talked about the opportunities and challenges facing steel producers. You can get the story here: U.S. Steel Producers On A Roll As May 1 Deadline Approaches
This week, let’s see if the valuation warrants investment or if the good news is already priced in.
First off, it’s worth noting that the industry is in the top 6% of Zacks classified industries, usually indicating the existence of some positive drivers. The following price chart also therefore shows an attractive trend with respect to the S&P 500.
As far as individual stocks are concerned, let’s take Steel Dynamics (NASDAQ:STLD) first, which has a Zacks Rank #1 (Strong Buy), a VGM (value-growth-momentum) score of B meaning it is suitable for all kinds of investors and earnings surprise of 5.5% in the March quarter and positive estimate revision trend (2018 earnings estimate up 8.4% and 2019 estimate up 0.4% in the last 7 days)
In the last quarter, revenue grew 10.0% year on year, earnings grew 17.1%, ASP grew 11% and utilization was 94%. This demonstrates the thesis that both demand and prices are up following the tariff on imports.
Now for the valuation:
The company’s price to sales is 1.13x compared to 3.28x for the S&P 500.
Its price by earnings growth is 0.85x compared to the S&P 500’s 1.71x.
The price to book value is 3.31x compared to 3.71x for the S&P 500.
The price to free cash flow basis also shows that the company is undervalued with respect to the S&P 500.
Second is Nucor Corporation (NYSE:NUE) , which has a Zacks Rank #2 (Buy), a VGM score of B, earnings surprise of 6.4% in the March quarter and positive estimate revision trend (2018 earnings estimate up 2.8% and 2019 estimate up 0.2% in the last 7 days).
In the last quarter, revenue grew 15.6% year on year, earnings grew 5.4%, ASP grew 9% and utilization increased a few points. So here too, both demand and prices appear to be benefiting from the tariff on imports.
Turning to the valuation:
The company’s price to sales is 0.96x compared to 3.28x for the S&P 500.
The price by earnings growth of 0.92 also compares favorably with the S&P 500’s 1.71x.
It’s price to book value is 2.16x compared to 3.71x for the S&P 500.
Next up is United States Steel Corporation (NYSE:X) , which has a Zacks Rank #1, a VGM score of A, earnings surprise of 11.8% in the December quarter (next earnings report on April 30) and positive estimate revision trend (2018 earnings estimate up 32.9% and 2019 estimate up 30.9% in the last 60 days).
As for valuation, the company’s price to sales is 0.54x compared to 3.28x for the S&P 500.
The price by earnings growth is 0.86x compared to the S&P 500’s 1.71x.
Its price to book value is 1.96x compared to 3.71 for the S&P 500.
The price to free cash flow basis also shows that the company is undervalued with respect to the S&P 500.
Arcelor Mittal (NYSE:MT) has a Zacks Rank #1, a VGM score of A, earnings surprise of 12.5% in the December quarter (next earnings report on May 11), positive estimate revision trend (2018 earnings estimate up 4.6% and 2019 estimate up 9.1% in the last 60 days).
The company’s price to sales is 0.5x compared to 3.28x for the S&P 500.
The company’s price by earnings growth is 0.64x compared to the S&P 500’s 1.71x.
It’s price to book value is 0.84x compared to 3.71 for the S&P 500.
The price to free cash flow basis also shows that the company is undervalued with respect to the S&P 500.
Last Word
Not all stocks stand to gain from recent developments and even for those that do, it’s a good idea to take a look at the valuation metrics to see if more upside is indicated. Also, a buy rank is for the short term, so investors stocking up for the long haul should also consider fundamentals before jumping in.
Here is the complete list of today’s Zacks #1 Rank (Strong Buy) stocks .
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Steel Dynamics, Inc. (STLD): Free Stock Analysis Report
ArcelorMittal (MT): Free Stock Analysis Report
United States Steel Corporation (X): Free Stock Analysis Report
Nucor Corporation (NUE): Free Stock Analysis Report
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