The Russian invasion of Ukraine is on its 44th day today. The war has left in its wake and continues to leave loss of lives and damage to property. This week, a missile strike on the Kramatorsk railway station in eastern Ukraine has considerably lost lives, with Russia denying responsibility for the attack.
The invasion has significantly affected the commodity and equity markets. In addition to crude oil and natural gas, other strategic commodities, steel prices have surged. Russia and Ukraine account for 7.5% of global iron and steel exports, with Russia ranking 5th with 5.2% and Ukraine ranking 15th with a 2.3% share of global exports.
With this in mind, today I will analyze three prominent steel stocks, ArcelorMittal (MT), Reliance Steel & Aluminum Co. (RS), and Ternium S.A. (TX), which might stand to benefit from the current situation.
The Steel Industry
The global steel industry started the year with a tailwind, on the back of the improving economic conditions as the COVID-19 cases reduced significantly. The steel market expected a continuous recovery in 2022 as construction and manufacturing geared up once again. In the United States, the infrastructure spending act was set to boost steel demand.
Since Russia invaded Ukraine on February 24th, 2022, steel prices have jumped 8.5%. That’s because Russia and Ukraine account for a fifth of imports to the European Union. Analyst Kaye Ayub at consultancy MEPS International said, "It's certainly looking like prices will continue to rise in the short term. We're forecasting that prices will jump again by the end of this month and into April. The supply side has been massively disrupted in Europe, and that will take quite a while to resolve."
Performance of Major Industry Participants
Mitsui & Co., Ltd. (MITSY), based in Tokyo, Japan, has a market capitalization of $40.57 billion and is one of the biggest names in the steel industry. MITSY’s year-to-date gains of 6.5% have broadly outpaced the S&P 500’s 5.6% decline over the same period.
Another notable name in the industry is steel manufacturer Nucor Corporation (NUE). The stock has gained 32.2% year-to-date. The company has a $40.56 billion market capitalization.
Last month, NUE raised its increased sheet prices by $100 per short ton or $5 per hundredweight, with other mills rushing to do the same, as the steel market participants expected the war to increase prices and decrease raw material availability in the face of a strong springtime demand.
Best Steel Stocks to Buy Now
Given the supply constraints and increasing prices, we expect the following fundamentally strong steel stocks to benefit in the upcoming months.
ArcelorMittal (MT)
MT owns and operates steel manufacturing and mining facilities in Europe, North and South America, Asia, and Africa. It sells its products to customers in the automotive, appliance, construction, and machinery industries. It is headquartered in Luxembourg City, Luxembourg.
MT’s sales increased 46.7% year-over-year to $20.81 billion in the fiscal fourth quarter ended December 31. Net income attributable to equity holders of the parent and earnings per common share came in at $4.05 billion and $3.92, up 235.1% and 292%. EBITDA rose 192.7% from the prior-year quarter to $5.05 billion.
Street EPS estimate of $3.37 for the fiscal quarter ended March 2022 indicates a 74.6% year-over-year increase. Moreover, MT has an impressive earnings surprise history as it has topped consensus EPS estimates in three out of the trailing four quarters.
The stock has gained 4.8% over the past year and 10.2% over the past month to close yesterday’s trading session at $30.81.
MT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
MT has an A grade for Value, in sync with its forward non-GAAP P/E multiple of 3.21, which is 75.5% lower than the industry average of 13.11. In terms of its forward Price/Book, the stock is trading at 0.48x, 78% lower than the industry average of 2.20x. MT also has a Momentum grade of A.
MT has a Quality grade of B, which is justified by its trailing 12-month ROE of 34.23%, 166.18% higher than the industry average of 12.86%. The stock has a B grade for Growth and Sentiment. In the 33-stock Steel industry, it is ranked #4. The industry is rated A.
To see the additional POWR Rating for Stability for MT, click here.
Reliance Steel & Aluminum Co. (RS)
RS is a diversified metal solutions provider and metal service center company internationally. The company distributes several metal products, including alloy, aluminum, brass, copper, carbon, stainless steel, titanium, and specialty steel products. The company also provides metal processing services to different industries.
For the fiscal fourth quarter ended December 31, RS’ net sales increased 86.9% year-over-year to $3.99 billion. Operating income rose 206.8% from the prior-year quarter to $562.60 million. Non-GAAP net income attributable to Reliance and non-GAAP EPS improved 234.5% and 239.8% from the same period the prior year to $433.80 million and $6.83.
The consensus EPS estimate of $7.14 for the quarter ended March 2022 indicates a 74.1% year-over-year increase. The consensus revenue estimate for the same quarter of $4.16 billion reflects a rise of 46.4% from the prior-year quarter. In addition, RS has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
RS’ shares have gained 15.5% over the past year and 10% year-to-date to close yesterday’s trading session at $178.45.
It’s no surprise that RS has an overall A rating, which translates to Strong Buy in our POWR Rating system.
RS has a Momentum grade of A, which is justified as the stock is currently trading above its respective 50-day and 200-day Moving Averages of $177.73 and $159.49.
RS has a B grade for Growth, consistent with its net income and EPS growing at a CAGR of 30.6% and 35.9% over the past three years. The stock also has a Sentiment and Quality grade of B. It is ranked #10 in the Steel industry.
Click here to see the additional POWR Ratings for RS (Value and Stability).
Ternium S.A. (TX)
TX, with its subsidiaries, is a manufacturer of steel products. It operates through two segments – Steel and Mining. The company also provides financial, social, and engineering services and operates as a distribution firm. It is based in Luxembourg City, Luxembourg.
For the fourth fiscal quarter of 2021, TX’s net sales increased 67.8% year-over-year to $4.33 billion. EBITDA stood at $1.50 billion, up 133.2% from the prior-year period. Profit for the period and earnings per ADS rose 31.4% and 25.4% from the same period the prior year to $1.14 billion and $5.08.
Analysts expect TX’s EPS to increase 9.1% year-over-year to $3.35 for the fiscal quarter ended March 2022. Likewise, Street expects revenue for the same period to improve by 40.9% from the prior-year quarter to $4.24 billion. TX has beaten consensus EPS estimates in each of the trailing four quarters.
The stock has gained 21.8% over the past year and 10.2% year-to-date to close yesterday’s trading session at $47.97.
This promising outlook is reflected in TX’s POWR Ratings. The stock has an overall A rating, equating to Strong Buy in our proprietary rating system.
TX has an A grade for Momentum, which is justified by the stock trading above its 50-day Moving Average of $42.04 and 200-day Moving Average of $44.39. The stock also has a Quality grade of A.
TX has a Value grade of B, in sync with its forward EV/EBIT multiple of 3.16, 70.5% lower than the industry average of 10.72. The stock also has a B grade for Sentiment. It is ranked #8 in the same industry.
In addition to the POWR Rating grades we’ve stated above, one can see TX ratings for Growth and Stability here.
MT shares were trading at $30.60 per share on Friday afternoon, down $0.21 (-0.68%). Year-to-date, MT has declined -3.86%, versus a -5.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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