High inflation, rising interest rates, and fears of a recession affected steel demand last year. However, demand is expected to grow amid the reopening of the Chinese economy, easing inflation, and the focus of the U.S. government on improving infrastructure.
Amid this backdrop, it could be wise to buy fundamentally strong steel stocks ArcelorMittal S.A. (MT), Commercial Metals Company (CMC), and Aperam S.A. (APEMY).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the steel industry is likely to grow.
Global crude steel production fell for the first time in seven years in 2022 due to China’s strict zero-COVID policy. According to the World Steel Association, global crude steel output fell 4.2% year-over-year to 1.87 billion tons last year. With the Chinese economy reopening and the government’s infrastructure spending push, steel demand is expected to rise.
Moreover, the Infrastructure Investment and Jobs Act (IIJA) provides $550 billion over fiscal years 2022 through 2026 to improve roads, bridges, water infrastructure, etc. Steel is an essential commodity when it comes to improving infrastructure. Such investments by the American government to improve infrastructure will raise steel demand.
Fitch believes that the U.S. steel industry has undergone meaningful consolidation over the past few years, helping it gain supply discipline. Investments in reducing costs and raising value-added production will help stabilize margins.
Moreover, the U.S. steel demand would be supported by the IIJA, U.S. Inflation Reduction Act, and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act.
According to the World Steel Association, steel demand is expected to grow by 2.3% to reach 1,822.30 Mt. in 2023 and grow by 1.7% to reach 1,854 Mt. in 2024.
Let's take a closer look at the fundamentals of the featured stocks.
ArcelorMittal S.A. (MT)
Headquartered in Luxembourg City, Luxembourg, MT, together with its subsidiaries, operates as integrated steel and mining company in the Americas, Europe, Asia, and Africa. It offers semi-finished flat products, semi-finished long products, finished long products, and seamless and welded pipes and tubes.
On 14 June 2023, MT and John Cockerill announced plans to construct the world's first industrial-scale low temperature iron electrolysis plant. The Volteron plant aims to produce 40,000 to 80,000 tonnes of iron plates annually starting in 2027, with plans to increase capacity to 300,000 to 1 million tonnes once the technology is proven at this scale.
Brad Davey, EVP and head of corporate business optimization, MT, said, "It is a significant moment for ArcelorMittal, and for the global steel industry. Direct electrolysis is a disruptive, breakthrough technology. Although the technology needs to mature, it could revolutionize how steel is made, removing carbon entirely from steelmaking. We intend to be pioneers in that process.”
On May 4, 2023, MT announced a new buyback program for up to 85 million shares to be completed by May 2025. The shares bought back will reduce share capital, fulfill employee share program obligations, and meet MT’s obligations exchangeable into equity securities.
In terms of the trailing-12-month levered FCF margin, MT’s 7.34% is 106.5% higher than the 3.55% industry average. Likewise, its 8.20% trailing-12-month net income margin is 15.1% higher than the 7.12% industry average. Furthermore, its 0.79x trailing-12-month asset turnover ratio is 6.6% higher than the 0.74x industry average.
MT’s net sales for the first quarter ended March 31, 2023, came in at $18.50 billion. Its operating income came in at $1.19 billion. The company’s adjusted net income came in at $1.10 billion. Also, its EPS came in at $1.27. In addition, its EBITDA came in at $1.82 billion.
For the quarter ending December 31, 2023, MT’s revenue is expected to increase 0.7% year-over-year to $17 billion. Its EPS for fiscal 2024 is expected to increase 6.6% year-over-year to $5.08. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past nine months, the stock has gained 28.2% to close the last trading session at $26.35.
MT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value, Momentum, and Sentiment. Within the A-rated Steel industry, it is ranked #11 out of 33 stocks. To see MT’s rating for Growth, Stability, and Quality, click here.
Commercial Metals Company (CMC)
CMC manufactures, recycles, and fabricates steel and metal products, and related materials and services. The company processes and sells ferrous and nonferrous scrap metals to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, and other consumers. It also manufactures and sells finished long steel products and semi-finished billets.
On May 1, 2023, CMC announced the acquisition of a geosynthetics manufacturing facility from BOSTD – America, located in Blackwell, Oklahoma. The facility currently produces product lines for Tensar Geogrid through a contract manufacturing arrangement.
Although the acquisition will not immediately increase Tensar’s manufacturing capacity, it will enhance flexibility in Tensar’s supply chain and offer potential low-cost capacity expansions in the future.
On March 20, 2023, CMC announced the acquisition of Tendon Systems, LLC, a leading provider of post tensioning, barrier cable, and concrete restoration solutions to the Southeastern United States.
CMC’s Chairman of the Board, President, and CEO, Barbara R. Smith, said, “This acquisition further advances our leadership position in construction reinforcement, complements our existing position in post-tensioning cable, and provides CMC with additional capabilities to serve our customers. Tendon adds valuable expertise, innovative products, and a trusted reputation to the CMC portfolio.”
On March 3, 2023, CMC announced the acquisition of all assets of Roane Metals Group LLC, a metal recycling company. Roane operates two facilities in Tennessee, with an annual processing capacity of around 85,000 tons of ferrous and non-ferrous materials. This acquisition is expected to improve the security and affordability of input materials for CMC's steelmaking operations.
In terms of the trailing-12-month EBIT margin, CMC’s 14.31% is 24.1% higher than the 11.53% industry average. Likewise, its 6.99% trailing-12-month levered FCF margin is 96.8% higher than the 3.55% industry average. Furthermore, its 1.43x trailing-12-month asset turnover ratio is 91.3% higher than the 0.74x industry average.
For the fiscal third quarter ended May 31, 2023, CMC’s net sales came in at $2.34 billion. Its adjusted net earnings came in at $239.73 million. Its adjusted EBITDA increased 6% year-over-year to $402.18 million.
Additionally, its adjusted EPS came in at $2.02. For nine months ended May 31, 2023, its net cash flows from operating activities increased 286.6% year-over-year to $934.68 million.
Over the past year, the stock has gained 54.8% to close the last trading session at $53.33.
CMC’s POWR Ratings are consistent with this positive outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Momentum and Quality. It is ranked #12 in the same industry. Click here to see CMC’s ratings for Growth, Value, Stability, and Sentiment.
Aperam S.A. (APEMY)
Headquartered in Luxembourg City, Luxembourg, APEMY, together with its subsidiaries, engages in producing and selling stainless and specialty steel products worldwide. It operates through four segments: Stainless & Electrical Steel; Services & Solutions; Alloys & Specialties; and Recycling & Renewables.
In terms of the trailing-12-month levered FCF margin, APEMY’s 3.79% is 6.6% higher than the 3.55% industry average. Likewise, its 9.26% trailing-12-month Return on Total Capital is 51.4% higher than the 6.12% industry average. Furthermore, its 1.50x trailing-12-month asset turnover ratio is 101.3% higher than the 0.74x industry average.
APEMY’s net sales for the first quarter ended March 31, 2023, came in at €1.88 billion ($2.06 billion). Its operating income came in at €81 million ($88.83 million). The company’s adjusted net income came in at €132 million ($144.77 million). Its adjusted EPS came in at €1.83. Additionally, it's adjusted EBITDA came in at €127 million ($139.28 million).
Analysts expect APEMY’s revenue for fiscal 2024 to increase 2.3% year-over-year to $7.94 billion. Over the past nine months, the stock has gained 26.9% to close the last trading session at $31.09.
APEMY’s promising outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Value and a B for Momentum and Stability. It is ranked #13 in the Steel industry. To see APEMY’s ratings for Growth, Sentiment, and Quality, click here.
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MT shares were trading at $26.42 per share on Monday morning, up $0.07 (+0.27%). Year-to-date, MT has gained 1.47%, versus a 15.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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