3 Steel Stocks Galvanized For Solid Upside In The Second Half

The steel industry has staged a recovery after being out of favor for long. Improving steel prices, favorable developments on trade cases and expectations of significant infrastructure spending under the Trump administration are among the key factors that have put the wind back into the sails of the steel industry.

Sustained recovery in developed economies and continued growth in emerging economies are expected to help keep the steel industry on a positive growth path in 2017.

The World Steel Association expects global steel demand to expand 1.3% in 2017 after a 1% rise last year. The United States is expected to continue to lead growth in the developed world thanks to strong fundamentals, newly announced measures related to fiscal stimuli and rising infrastructure spending. Steel demand in the United States is expected to rise 3% this year.

The Eurozone economy has also gained traction of late, as evident from a slew of upbeat economic data that suggest a recovery is steadily firming in the region. Steel demand in the European Union is expected to go up 0.5% in 2017. Demand in emerging and developing economies (barring China) is also expected to rise 4% this year.

The Zacks Steel Producers industry has outperformed the broader market in a year’s time. The industry has gained around 32.5% in this period, higher than the S&P 500’s corresponding return of around 12.6%.

Moreover, valuation looks attractive for the steel industry. Going by the EV/EBITDA multiple (a preferred valuation metric for cyclical industries like steel) steel stocks appear inexpensive at this point. The Zacks Steel Producers industry has a trailing 12-month EV/EBITDA multiple of 7.3, which compares favorably to the S&P 500 EV/EBITDA multiple of 11. The industry’s lower-than-market positioning calls for some more upside moving ahead.

Let’s take a look into some of the factors that have contributed to a rebound in the steel space.

Trade Actions on Imports

One of the major factors that have fueled a recovery in the steel sector is favorable developments on a number of trade cases that led to a decline in steel imports. Affirmative rulings in these cases have been be a positive catalyst for the U.S. steel industry.

Steel imports fell around 15% year over year in 2016 on the back of punitive trade actions. Notably, positive rulings in trade cases (resulting in levy of heavy tariffs) against China last year led to a decline in Chinese steel exports to the United States.

Chinese steel exports fell significantly in the first eight months of 2017. Steel exports from the country went down 28.5% year over year to 54.47 million tons during this timeframe, per customs data.

The Trump administration’s aggressive trade policies are also expected to provide more protection to the U.S. steel industry. Steel stocks got a big lift in April 2017 after the Trump administration ordered an investigation under Section 232 of the Trade Expansion Act of 1962. The Section 232 probe is aimed at determining whether the imports pose a threat to national security and also gives the President the power to impose broad tariffs or quotas on imported steel.

While the findings from the Section 232 steel investigation are due, it goes without saying that a positive outcome from the probe will provide a major thrust to American steel makers.

Recovery in Steel Prices

Steel makers are also gaining from a recovery in steel prices. Steel prices have rebounded on the back of trade actions, reflected by a significant increase in hot-rolled and cold-rolled steel prices. Higher costs of steel-making inputs such as iron ore and coking coal have contributed to a recovery in prices. A number of steel companies inlcuding AK Steel Holding Corp. (NYSE:AKS) and United States Steel Corp. (NYSE:X) have been raising their steel selling prices in response to an increase in raw material costs.

China’s actions to reduce its excess steel supply are also expected to lend support to steel prices in 2017. The world’s largest steel producer has pledged to cut its steel production capacity by around 50 million metric tons in 2017.

Moreover, should the findings under the Section 232 investigation come positive, the Trump administration will get the opportunity to take broad-based trade actions against cheap imports. This would provide a significant boost to steel prices.

Trump’s Spending Boost

Steel stocks, which were in the dumps for the most part of 2016, got a shot in the arm following Donald Trump’s win in November on expectations of significant infrastructure spending under him.

The president’s call for the massive infrastructure spending is likely to have a beneficial effect on the steel industry given the expected increase in steel demand as steel is a key component in many infrastructure products. Trump’s “big” spending plans have thus painted a bullish picture for steel companies.

Strength in Major End Markets

Continued momentum in the automotive space and a recovery across housing and commercial construction markets have been other key tailwinds for the steel industry. The automotive and construction industries will continue to provide the backbone to the steel industry.

The automotive sector continues its healthy run, backed by an improving job market, rising personal income, low fuel prices and attractive financing options. Moreover, positives like an improving economy, healthy job growth, steady buyer demand, positive consumer confidence and a tight supply situation raise optimism about the housing and construction sector’s performance.

3 Steel Stocks Worth a Look Now

As the steel industry fundamentals are improving, it would be a prudent idea to invest in steel stocks that have compelling prospects and are well poised to run higher in the second half of 2017 leveraging improving steel market conditions. We highlight the following three steel stocks, armed with a solid Zacks rank, that are worth considering for investment right now.

Schnitzer Steel Industries, Inc. (NASDAQ:SCHN)

Headquartered in Portland, OR, Schnitzer Steel is a solid choice with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Schnitzer Steel has an expected earnings growth of 115.9% for the current year. The Zacks Consensus Estimate for 2017 has gone up 14.6% over the last 60 days. The stock has also gained 27.5% over the past six months, outperforming the Zacks Steel Producers industry’s gain of 3.8% over the same period.

Universal Stainless & Alloy Products Inc (NASDAQ:USAP)

Our next pick in the space is Bridgeville, PA-based Universal Stainless & Alloy, sporting a Zacks Rank #2 (Buy). It has an expected earnings growth of 154.1% for the current year. Earnings estimate for 2017 has improved 33% over the last 60 days. Moreover, the stock has gained 40.4% over the past six months, outperforming the Zacks Steel Producers industry’s gain of 3.8% over the same period.

POSCO (NYSE:PKX)

South Korea-based Posco, carrying a Zacks Rank #2, has an expected earnings growth of 116.5% for the current year. The company's earnings estimate for 2017 has improved 7.5% over the last 60 days. The stock also has an expected long-term earnings per share growth rate of 5%.

Posco has gained 22.4% over the past six months, outperforming the Zacks Steel Producers industry’s gain of 3.8% over the same timeframe.

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