The steel industry has been negatively impacted by reduced demand, labor shortages, and logistical disruptions owing to COVID-19-related lockdowns and the Russia-Ukraine war. However, the manufacturing and construction sectors’ robust prospects and increasing infrastructure investments should boost the steel industry.
The U.S. steel industry is poised to witness a strong recovery in demand as the federal government outlines new requirements on infrastructure projects. President Biden’s $1 trillion infrastructure plan requires infrastructure projects to be built with iron and steel produced in the United States. “We’re not going to need to depend on steel from China or any other country,” said Paul Scott, president of the Alliance for American Manufacturing. In addition, according to The World Steel Association, steel demand will grow by 0.4% in 2022 to 1,840.2 Mt and will further grow 2.2% next year, despite the uncertainties concerning the Russia-Ukraine war.
Given this backdrop, we think it could be wise to scoop up the shares of fundamentally sound steel stocks Ternium S.A. (TX) and ArcelorMittal S.A. (MT), which look undervalued at their current price level and are ‘Strong Buy’ rated in our proprietary POWR Ratings system.
Ternium S.A. (TX)
TX produces finished and semi-finished steel products and iron ore. It operates through two segments, Steel and Mining. The Luxembourg-based company serves various companies and small businesses in the construction, automotive, home appliances, agro, packaging, transport, and energy industries.
On February 24, TX announced plans to broaden its value-added product portfolio with a new investment program at its Pesquería industrial center in Mexico. This initiative should help the company serve its customers better in various sectors and strengthen its position as a leading steel supplier in Mexico.
TX’s net sales increased 32% year-over-year to $4.30 billion in its fiscal first quarter ended March 31, 2022. Its net income improved 24.2% year-over-year to $877.5 million, while its EPS increased 28.7% from its year-ago value to $3.95. Its EBITDA came in at $1.21 billion, up 14% from the same period last year.
TX is relatively undervalued compared to its peers. In terms of forward non-GAAP P/E, TX is currently trading at 3.18x, which is 72% lower than the 11.38x industry average. Its 0.50 forward Price/Sales multiple is 60% lower than the 1.26x industry average. In addition, the stock’s forward Price/Cash Flow and EV/EBITDA ratios of 2.05 and 2.08, respectively, compare with industry averages of 7.04 and 6.75.
The $4.83 billion consensus revenue estimate for its fiscal second-quarter ending June 30, 2022, indicates a 23.2% increase from the same period last year. Also, the company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.
Shares of TX have risen 15.6% in price over the past year to close yesterday’s trading session at $42.78.
TX’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
TX also has an A grade for Quality and a B grade for Value, Momentum, and Sentiment. In addition, the stock is ranked #8 of 33 stocks in the A-rated Steel industry. To see additional POWR Ratings for Growth and Stability for TX, click here.
ArcelorMittal S.A. (MT)
Headquartered in Luxembourg, MT owns and operates steel, iron ore manufacturing, and coal mining facilities in Europe, North and South America, Asia, and Africa. The Company operates through five segments: NAFTA; Brazil; Europe; Africa and Commonwealth of Independent States (ACIS); and Mining.
On April 14, MT announced its acquisition of a majority stake in Voestalpine’s state-of-the-art HBI facility in Texas. With this acquisition, the company expects to accelerate the production of high-quality metallic feedstock for EAFs and progress in decarbonization ambitions.
On March 22, MT partnered with Greenko Group, India’s leading energy transition company, to develop 975 MW of nominal solar and wind capacity. This strategic partnership should enable AM/NS India (a joint venture of MT) to reduce electricity costs and carbon emissions with consistent, guaranteed returns.
MT’s net sales increased 34.8% year-over-year to $21.84 billion in its fiscal first quarter (ended March 31, 2022). Its operating income rose 67.9% from its year-ago value to $4.43 billion. The company’s net income increased 80.5% year-over-year to $4.13 billion, while its EPS grew 120.6% year-to-year to $4.28.
MT is relatively undervalued compared to its peers. The stock’s 0.32 forward Price/Sales multiple is 74.8% lower than the 1.26 industry average. In addition, its 1.83 forward EV/EBITDA ratio is 72.8% lower than the 6.75 industry average.
Analysts expect MT’s revenue to come in at $25.53 billion for its fiscal second quarter (ending June 30, 2022), representing 16.5% growth year-over-year. The Street expects its EPS to rise 10% year-over-year to $3.81 in the current quarter. It has surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past five days, the stock has gained 8.1% in price to close yesterday’s trading session at $30.77.
MT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. MT has an A grade for Value and a B grade for Momentum, Sentiment, and Quality. The stock is ranked #3 of 33 stocks in the Steel industry.
In addition to the grades I have just highlighted, view MT ratings for Growth and Stability here.
Note that MT is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.
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TX shares were trading at $44.71 per share on Thursday afternoon, up $1.93 (+4.51%). Year-to-date, TX has gained 6.95%, versus a -14.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
2 Undervalued Steel Stocks Rated ’Strong Buy’ StockNews.com
