The steel industry has been boasting a steady recovery since the second half of 2020, driven by the resumption of industrial and manufacturing activities worldwide. The COVID-19 vaccine-driven improvement in the broader steel market outlook is evident in VanEck Vectors Steel ETF’s (SLX) 60.9% returns over the past six months.
China’s fast-paced economic recovery has been one of the key drivers of this industry because it is the largest consumer of steel globally. Moreover, the new Presidential administration in the United States has brightened the industry’s outlook, given Biden’s desire to introduce competitive foreign trade policies. Also, Moody's Investors Service has revised the outlook for the global steel industry to stable.
In an effort to improve the U.S. steel industry, which was crippled by Section 232 tariffs imposed by the previous administration, the Coalition of American Metal Manufacturers and Users has urged President Biden to eliminate a 25% import tariff on steel to make the industry more competitive globally . In addition, Biden’s proposed $2 trillion clean energy initiative is expected to contribute significantly to the steel industry’s long-term growth.
Given this backdrop, we think Companhia Siderúrgica Nacional (SID), Ternium S.A. (TX) and Insteel Industries, Inc. (IIIN) are worth adding to one’s portfolio now. These stocks are benefiting from improving fundamentals in the steel industry and exhibit favorable prospects.
Companhia Siderúrgica Nacional (SID)
Based in Brazil, SID is an integrated steel producer; The Company operates throughout the entire steel production chain, from the mining of iron ore to the production and sale of a range of steel products, including coated galvanized flat steel and tinplate. The company operates in five segments: Steel, Mining, Cement, Logistics and Energy.
In the fourth quarter of 2020, the company issued debt securities, specifically bonds maturing in 2028. This liquidity reinforcement will assist the SID in completing its negotiations for re-profiling the maturities of its debt, which it expects to do over the next three years.
Last October, SID became a signatory to the United Nations Global Compact, joining the organization's Action Platform on Climate Change.
SID’s net sales have increased 50.1% year-over-year to R$9.79 billion in the fourth quarter ended December 31, 2020. Its adjusted EBITDA has risen 200% from its year-ago value to R$4.74 billion, yielding an EBITDA margin of 47%, up 2,340 basis points year-over-year. Its net income for the period has increased 243.7% to R$3.90 billion.
Analysts expect SID’s EPS to grow 166.7% year-over-year to $0.12 in the current quarter, ending March 31, 2021. The company has an impressive earnings surprise history: it beat the Street’s EPS estimates in three out of the trailing four quarters. The stock has gained 111.6% over the past six months.
SID’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
SID has a B grade for Quality, Growth and Sentiment. Of the 35 stocks in the A-rated Steel Industry, the stock is ranked #6.
In total, we rate SID on eight different levels. Beyond what we’ve stated above, we have also given SID grades for Momentum, Value and Stability. Get all SID’s ratings here.
Ternium S.A. (TX)
Based in Luxembourg, TX manufactures and processes finished and semi-finished steel products and iron ore, which are sold either directly to steel manufacturers, steel processors or end users. The company operates through two segments: Steel and Mining. It serves customers active in the automotive, home appliances, HVAC, construction, capital goods, container, food and energy industries through its manufacturing facilities, service center and distribution networks, and advanced customer integration systems.
During the fourth quarter of 2020, the pandemic's impact on steel demand in the Americas lessened significantly, allowing all of TX’s industrial facilities to return to normal production. TX’s total steel shipments have increased 5.1% year-over-year to 3.07million tons in the fourth quarter, ended December 31, 2020. In Mexico, the company's main steel market, shipments recovered 6.4% year-over-year to 1.64 million tons. The company’s manufacturing industries continued ramping up their facilities during the quarter, and activity in the construction sector improved slightly.
TX’s net sales have increased 14.7% year-over-year to $2.58 billion, while its EBITDA has risen 145.2% from the year-ago value to $645.20 million, yielding an EBITDA margin of 25%, up 1300 basis points over the three-month period. Its earnings have improved 750% year-over-year to $3.06 over the same period.
Analysts expect TX’s revenues to grow 26.7% year-over-year to $2.88 billion in the current quarter, ending March 31, 2021. A consensus EPS estimate of $2.05 for the first quarter represents a 3516.7% improvement from the year-ago value. The stock has gained 75.5% over the past six months.
TX’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system. TX has a B grade for Quality, Value and Growth and an A for Sentiment. Within the same Industry, it is ranked #1 of 35 stocks.
In total, we rate TX on eight different levels. Beyond what we stated above, we have also given TX grades for Stability and Momentum. Get all of TX’s ratings here.
Insteel Industries, Inc. (IIIN)
IIIN manufactures and markets steel wire reinforcing products for concrete construction applications. Its concrete reinforcing products consist of two product lines: pre-stressed concrete strand (PC strand) and welded wire reinforcement (WWR). The company’s products are sold primarily to manufacturers of concrete products and concrete contractors for use, primarily, in nonresidential construction applications.
In terms of non-GAAP forward p/e, the stock is currently trading at 15.72x, 22% lower than the industry average 28.41x.
On January 8, the International Trade Commission ruled in IIIN’s favor with respect to PC Strand trade cases pending against eight countries that resulted in the implementation of duties on the company’s exports to U.S. markets ranging from 24% to 194% of value. This favorable ruling in the global trade dispute levels the playing field with producers in the other eight countries.
IIIN’s net sales have increased 22.6% year-over-year to $119.61 million in the fiscal first quarter, ended January 2, 2021. This was driven primarily by a 21.6% increase in shipments in addition to a 1.0% increase in average selling prices. Its gross profit has risen 218.3% from its year-ago value to $19.85 million due primarily to a combination of wider spreads between selling prices and raw material costs, and higher shipment volume, while its EPS has improved 1300% to $0.42 over the same period.
Analysts expect IIIN’s revenues to grow 12.1% year-on-year to $529.88 million in its fiscal 2021,ending September 30. A consensus EPS estimate of $1.96 for the current year represents an 84.9% improvement year-on-year. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 71.9% over the past six months.
IIIN has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. IIIN has a B grade for Value, Growth, and Quality. In the A-rated same industry, the stock is ranked #3.
Click here to see the additional POWR Ratings for IIIN (Momentum, Stability and Sentiment).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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SID shares were unchanged in after-hours trading Tuesday. Year-to-date, SID has gained 2.52%, versus a 3.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands.
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