4 Steel Producer Stocks to Buy From a Promising Industry

Oct 27, 2023

The Zacks Steel Producers industry is poised to ride on a recovery in demand in automotive, a major market, as the semiconductor crisis gradually eases and automakers ramp up production. The sizable infrastructure investment also augurs well for the U.S. steel industry. Steel prices are also likely to gain support from demand recovery and infrastructure spending.A resilient non-residential construction market and healthy demand in the energy space also represent tailwinds for the industry. Players from the industry like Nucor Corporation NUE, Steel Dynamics, Inc. STLD, TimkenSteel Corporation TMST and Olympic Steel, Inc. ZEUS are well-placed to gain from these trends.

About the Industry

The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products. Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world’s total consumption.

What's Shaping the Future of the Steel Producers' Industry?

Demand Strength in Major End-use Markets: Steel producers are set to gain from a rebound in demand across major steel end-use markets such as automotive, construction and machinery from the coronavirus-led downturn. They are expected to benefit from higher-order booking from the automotive market in 2023. Steel demand in automotive is expected to improve this year on the back of an easing of a global shortage in semiconductor chips that weighed heavily on the automotive industry for nearly two years. Low dealer inventories and pent-up demand are likely to be supporting factors. Order activities in the non-residential construction market also remain strong, underscoring the inherent strength of this industry. Demand in the energy sector has also improved on the back of an uptick in oil and gas prices. Favorable trends across these markets augur well for the steel industry.Auto Recovery, Infrastructure Spending to Aid Steel Prices: Steel prices witnessed a sharp correction globally in 2022 as the Russia-Ukraine conflict, skyrocketing energy costs in Europe, persistently high inflation, interest rate hikes and the slowdown in China due to new COVID-19 lockdowns dwindled demand for steel across key end-use markets. Notably, U.S. steel prices tumbled after surging to roughly $1,500 per short ton in April 2022 due to supply concerns stemming from the Russia-Ukraine war. The benchmark hot-rolled coil ("HRC") prices cratered to near the $600 per short ton level in November 2022. The downward drift partly reflects weaker demand and fears of a recession. However, prices have found some support of late from U.S. steel mills’ price hike actions and a recovery in demand. A rebound in automotive demand is also expected to give a boost to steel prices this year. The massive infrastructure development project is also likely to be a catalyst for the American steel industry and U.S. HRC prices in 2023. The sizable federal infrastructure spending would have a beneficial effect on the U.S. steel industry, given the expected rise in consumption of the commodity.Slowdown in China a Cause for Concern: Steel demand in China, the world’s top consumer of the commodity, has softened since the second half of 2021 due to a slowdown in the country’s economy. New lockdowns are taking a significant toll on the world’s second-largest economy. A slowdown in manufacturing activities has led to a contraction in demand for steel in China. The manufacturing sector has taken a beating as the virus resurgence has hurt demand for manufactured goods and supply chains. China has also seen a slowdown across the construction and property sectors. The country’s real estate sector has taken a hard hit from repeated lockdowns. Investment in the sector has slowed to its lowest level in roughly three decades. The slowdown in these key steel-consuming sectors is expected to hurt demand for steel over the short term.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #9, which places it at the top 4% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Steel Producers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.The industry has gained 2.2% over this period compared with the S&P 500’s decline of 18% and the broader sector’s decline of 3.2%.

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 3.89X, below the S&P 500’s 11.75X and the sector’s 7.85X.Over the past five years, the industry has traded as high as 11.52X, as low as 2.48X and at the median of 6.71X, as the chart below shows.

4 Steel Producers Stocks to Keep a Close Eye on

Nucor: Charlotte, NC-based Nucor, sporting a Zacks Rank #1 (Strong Buy), makes steel and steel products with operating facilities in the United States, Canada and Mexico. The company is benefiting from strength in the non-residential construction market. It is also seeing improved conditions in heavy equipment, agriculture and renewable energy markets. Nucor should also gain from considerable market opportunities from its strategic investments in its most-significant growth projects. NUE remains committed to boosting production capacity, which should drive growth and strengthen its position as a low-cost producer.Nucor’s earnings beat the Zacks Consensus Estimate in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 3.1%, on average. The Zacks Consensus Estimate for 2023 earnings for NUE has been revised 15.9% upward over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Steel Dynamics: Based in Indiana, Steel Dynamics is a leading steel producers and metals recycler in the United States, sporting a Zacks Rank #1. It is benefiting from strong momentum in the non-residential construction sector driven by healthy customer order activity. Steel Dynamics is also currently executing a number of projects that should add to its capacity and boost profitability. STLD is ramping up operations at its Sinton Flat Roll Steel Mill. The planned investment in a new state-of-the-art low-carbon aluminum flat-rolled mill also continues its strategic growth.The consensus estimate for earnings for Steel Dynamics for 2023 has been revised 36.3% upward over the past 60 days. STLD also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 6.2%.

Olympic Steel: Ohio-based Olympic Steel, carrying a Zacks Rank #1, is a leading metals service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin plate, and metal-intensive branded products. It is benefiting from its strong liquidity position, actions to lower operating expenses, and strength in its pipe and tube and specialty metals businesses. Improving industrial market conditions and a rebound in demand are expected to support its volumes. The company’s strong balance sheet also allows it to invest in higher-return growth opportunities.The Zacks Consensus Estimate for Olympic Steel’s 2023 earnings has been revised 21.1% upward over the past 60 days. ZEUS has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 25.4%.

TimkenSteel: Ohio-based TimkenSteel engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company is benefiting from higher industrial and energy demand and a favorable pricing environment, notwithstanding the semiconductor supply-chain disruptions that are affecting shipments to mobile customers. TMST is seeing continued recovery in its industrial markets. Higher end-market demand and cost-reduction actions are also aiding its performance. It is gaining from its efforts to improve its cost structure and manufacturing efficiency.TimkenSteel, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 28.9% for 2023. The consensus estimate for 2023 earnings has been revised 97% upward over the past 60 days.

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