The Nerve of Steel
Steel stocks. They’re staid, unglamorous and for the last three years, they haven’t earned, well, a plugged nickel. So is there any reason to buy them?
Yes, some analysts say. A few steel issues have gotten knocked down so much that, relative to their financial prospects today, they’re bargains that could offer rewards in the months ahead.
Investors certainly couldn’t be blamed for looking elsewhere. In the last three years, during which the Standard & Poor’s 500 index has roared ahead 77%, the S&P;’s index of steel stocks has fallen 26%.
Bethlehem Steel Corp. (ticker symbol: BS) has tumbled 62% in that period. Inland Steel Industries Inc. (IAD) is down 44%. LTV Corp. (LTV) is off 29%.
The stocks have suffered even though world demand for steel is strong and the U.S. steelmakers’ factories have been running full-steam. Trouble is, there’s still plenty of steelmaking capacity elsewhere around the world, and that’s made it hard to raise prices and profits.
For instance, the price of U.S.-produced flat-rolled steel--the dominant steel used by American manufacturers for car roofs, appliances and the like--is about $315 a ton today, down from more than $500 in the 1980s.
To be sure, the price was higher back then in good part because most big U.S. steelmakers were inefficient and cost-heavy. The companies were hammered by less-costly imports and by emerging “mini-mills” such as Nucor Corp. (NUE), which used scrap and electricity to make steel at a much lower cost.
The big steelmakers have taken steps to become more efficient, but many are still struggling. Generally soft prices are making it hard for them to post consistently growing profits.
Another culprit: The companies’ aging mills, which often break down from constant use. “Their costs for maintenance have skyrocketed, and that’s taking away the advantage of any other cost savings the companies are getting,” said analyst Kenneth Hoffman at Prudential Securities Inc.
Investors also are worried that prices will again fall when several new U.S. steel mills come on line. In addition, they’re waiting for 4,500 workers at Wheeling-Pittsburgh Steel Corp., a unit of WHX Corp. (WHX), to end their strike, which began Oct. 1.
All of which has some analysts predicting that prices of flat-rolled steel, long products (structural steel bars and beams) and stainless steel could drop anywhere from 5% to 15% this year.
So, even though there are 58 publicly traded steel and steel-processing companies, analysts are recommending only a few that they believe can survive in the current environment.
These typically are producers that are cutting costs, using new technologies to become more efficient. Their shares also are trading at prices that make them valuable.
Hoffman, for example, has “buy” recommendations on only a handful of stocks: AK Steel Holding Corp. (AKS), LTV, USX/U.S. Steel (X) and Commercial Metals Co. (CMC). Last week, he also put out a buy recommendation on British Steel’s American depositary receipts (BST).
USX/U.S. Steel, the nation’s biggest producer, “is expected to show strong earnings growth over the next three quarters as the domestic steel market . . . remains tight,” he said.
Indeed, Hoffman is much more bullish on the steel industry generally than many of his peers, predicting that rising demand will start outpacing supplies and lead to a 30% to 50% jump in world prices over the next two years.
Even beleaguered Bethlehem Steel has its fans, including Salomon Bros. analyst Michelle Galanter Applebaum, who is recommending the stock since Bethlehem posted “higher-than-expected shipments and operating profit per ton” in the fourth quarter of 1996. The stock now trades at about $8.25 a share.
But many other analysts are sticking with smaller steel processors and mini-mill operators, companies using advanced technology and low costs to convert raw steel into specific products such as wire and auto parts.
Steel Dynamics Inc. (STLD), based in Butler, Ind., is a pick of R. Wayne Atwell at Morgan Stanley & Co. The company, which went public at $16 a share in November and now trades at about $19.50, is keeping prices up and costs down, and is ahead of schedule in building a new mill.
Richard Aldrich, analyst at Lehman Bros., has a buy recommendation on Northwestern Steel & Wire Co. (NWSW), recently trading around $4 a share on Nasdaq. Despite recent losses, “the worst seems to be behind the company,” and recent price hikes will also help swell the company’s results, he said in a recent report.
And speaking of small producers, consider Texas Industries Inc. (TXI), now trading at about $27.50 a share. The company, which also is a major cement maker, has posted strong earnings growth for three years running and had a 2-for-1 stock split last month.
Times staff writer James F. Peltz can be reached at james.peltz@latimes.com
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Pedal Off the Metal
Most steel stocks have languished badly in recent years, but analysts say a select few could rebound in the months ahead. A look at some notable steel shares:
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Ticker Recent 12-month Stock symbol price % change AK Steel AKS $35.25 --5% Bethlehem Steel BS 8.25 --42 Commercial Metals CMC 29.00 +7 LTV LTV 12.50 --4 Nucor NUE 48.50 --14 USX/US Steel X 30.00 --10 Bloomberg Steel Index --11 Standard & Poor’s 500 +22
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Source: Bloomberg News
