The US steel market is facing headwinds given low metal prices. There are many factors that could be encouraging this issue, including the declining prices of raw materials, which impact steel production. On the other hand, there’s been increased imports of Chinese steel into the US, which is another reason of concern for these companies.
Despite all of these issues, investors can find an opportunity to enter this market. The construction sector has been recovering and this could be advantageous for the steel industry. Let’s take a look at the very competitive steel business.
The global steel king
ArcelorMittal (ADR) (NYSE:MT), with its vertical integration and high degree of operating leverage, is well-positioned relative to other steelmakers. The main concern about the company is that most of its production is destined to the sluggish European market. That said, ArcelorMittal (ADR) (NYSE:MT) has arguments to show a little recovery.
The company has already beaten its guidance and has reaffirmed its expectations to beat its net-debt guidance too. Consequently, covenant breaches have disappeared thus lowering the risk premium related to the stock.
ArcelorMittal (ADR) (NYSE:MT) is currently trading at x6.4 EV/EBITDA for 2013 and x4.2 EV/EBITDA for 2014. Even if only a small share of the company’s EBITDA (around 7%) comes from the US, I think that ArcelorMittal (ADR) (NYSE:MT), trading at 33% of its book value, represents a long-term opportunity for those looking for exposure to the global steel market.
A leveraged US steel bet
United States Steel Corporation (NYSE:X) has proven to lead the pack. In the US, the company has achieved an 80% of self-sufficiency in coke and almost completely in iron ore. This vertical integration gives the company a cost advantage over its competitors as it sources the majority of its raw materials at cost and mitigates cost volatility, a winning card these days.
The company, with a net-debt-to-EBITDA ratio at x4.6, is a leveraged play within the US steel industry. The company’s fundamentals are ameliorating fast and there are positive points that should be highlighted.
The key aspect for this company is its European profitability, which has showed significant improvement (its highest level since 2010). Finally, United States Steel Corporation (NYSE:X) paid the majority of its convertible notes due in 2014 and increased its liquidity to $2.5 billion. US Steel is currently trading at x8 EV/EBITDA for 2013 but analysts expect the company to increase its earnings for 2014. This stock is the right bet for those who are looking for a risky US stock.
Nucor Corporation (NYSE:NUE): The safest company
Nucor Corporation (NYSE:NUE) is the largest US steel manufacturer by production, and its mills are among the most modern and efficient in the world. Being the profitability champion within the steel sector, Nucor Corporation (NYSE:NUE) is investing for future growth. The company has invested $800 million of its 2013 capital-expenditure target without incurring the dangerous leverage that characterizes the steel industry. With a net- debt-to-EBITDA ratio at x1.7, the company has a very strong balance sheet.
Even if Nucor Corporation (NYSE:NUE) trades at a premium to its peers, the premium is more than justified. The company is the safest bet within an industry that has been operating under pressure for many years. As a matter of fact, it is the only company within this group of three that has been consistently making money since the 2009 crisis. Nucor Corporation (NYSE:NUE) is trading at x10.3 EV/EBITDA for 2013 and a P/E ratio of x24, which is well above its peer group.
Final comment
Although the steel market is experiencing some difficulties, I think that there is a good opportunity for the future. The companies analyzed above have different types of risks and rewards. For those looking for global exposure to steel prices, ArcelorMittal (ADR) (NYSE:MT) might be a good option. For those looking for a safe and US-focused stock, Nucor Corporation (NYSE:NUE) is the answer. Meanwhile, for investors looking for a healthy balance sheet at a premium price, they should go for US Steel.
The article The Best Way to Play a US-Led Steel Recovery originally appeared on Fool.com.
Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool owns shares of ArcelorMittal. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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