The analysts at Standard & Poor’s, who have pegged the U.S. economy’s growth rate at a paltry 2% for 2012, say that advisors and investors might find some value in steel stocks and ETFs.
Leo Larkin, S&P Equity Research’s Equity mining and metals analyst told On Wall Street, “Investors have priced a recession into the value of steel stocks, and I don’t see it. So I would say that steel is undervalued right now.”
Larkin was quick to note one caveat: “If auto sales flatten, or if the economy slows down, steel companies would have a problem,” he said.
As it is, Larkin said steel has done reasonably well throughout this slow recovery.
“Cars have been a pretty strong market,” he explained. “There has also been inventory building, and the distributor market -- the companies that buy steel from the mills and then process it and sell it to end users, like construction and autos -- has been strong too.”
His report found that while domestic steel production for the first half of 2011 was up 4.4%, inventories remain lean enough to support high prices for the metal.
Distributors had only 2.7 months of supply on hand at the end of July, which is below the industry norm of three months. Steel shipments also rose by 6% during the first half of the year, despite weak GDP growth. Shipments to automakers alone rose 14% during the period, with shipments to construction and distributor markets rising by 6.1% and 9.8%, respectively.
Among the four domestic steelmakers that S&P follows as a proxy for the whole industry -- AK Steel Holdings (AKS), Nucor (NUE), Steel Dynamics (STLD) and United States Steel (USS) -- aggregate earnings for the first half of 2011 rose 9.1-fold on a 21% gain in revenue, thanks to higher pricing, greater capacity utilization and higher shipment volumes.
While business may slow in the second half, the companies are expected to remain profitable in the third and fourth quarters. Furthermore, steel consumption is predicted to increase by 7% in 2012.
Larkin suggests investors who want to include steel in their portfolios should consider the Market Vectors Steel ETF (SLX), which tracks companies in the sector. Nucor and Reliance Steel & Aluminum are both among this ETF’s current Top 10 holdings.