According to analysts at Goldman Sachs, steel stocks are poised for a significant turnaround. The bank suggests that the sector is nearing a bottom, creating an attractive entry point for contrarian investors to find value. Despite a projected 0.9% decline in global steel demand for 2024, a rebound of 1.2% is expected in 2025, underscoring potential recovery.
Several catalysts are aligning to drive growth in domestic steel production. The anticipated decline in interest rates is expected to reinvigorate construction activity, while ongoing infrastructure projects maintain steady demand. This base demand is further amplified by the surge in data center construction, driven by expanding artificial intelligence (AI) infrastructure needs.
Goldman Sachs analyst Mike Harris has identified three companies particularly well-positioned to capitalize on these emerging opportunities: Nucor Corporation (NUE), Commercial Metals Company (CMC), and Cleveland-Cliffs (CLF).
With steel prices expected to stabilize around $660 per ton in 2024 and potential trade policy benefits on the horizon, let's examine three steel stocks that could be hidden gems in a market searching for its next big winners.
Steel Stock #1: Nucor Corporation
Nucor Corporation, a titan in the steel industry, has been making strategic moves to maintain its competitive edge. The company's recent partnership with Mercedes-Benz to supply low-carbon steel to the automaker's Alabama plant showcases its commitment to innovation and sustainability. This deal, inked in April 2024, not only bolsters Nucor's green credentials, but also opens up new avenues for growth in the automotive sector.
Despite these positive developments, Nucor's stock has faced some headwinds. NUE stock is down nearly 17% year-to-date and 10.9% over the past 52 weeks. However, the stock has shown recent signs of recovery, gaining 2.6% in the last 3 months.
This volatility reflects the broader challenges in the steel market, which Nucor has been actively addressing through diversification efforts, including expansion into solar array components and utility structures.
Nucor's financial performance remains solid, with third-quarter 2024 earnings surpassing analyst expectations. The company reported adjusted net earnings of $353.0 million, or $1.49 per diluted share, beating the consensus estimate of $1.40. However, consolidated net sales saw a decline, reaching $7.44 billion, down 8% from the previous quarter and 15% year-over-year.
Looking ahead, Nucor anticipates lower earnings in Q4 2024 due to expected decreases in steel mills and product segments, although the raw materials segment is projected to improve.
On the valuation front, Nucor trades at a P/E ratio of 17x, with a market capitalization of $33.48 billion. The company's dividend story is particularly impressive, boasting 51 years of consecutive growth, with a forward dividend of $2.16 and a yield of 1.45%.
Goldman Sachs views Nucor favorably, with analyst Mike Harris describing it as representing "quality through-cycle steel exposure." The investment bank has issued a “Buy” rating with a price target of $190.
This bullish stance is echoed by the broader analyst community, with a consensus rating of “Moderate Buy.” The mean target price stands at $175.09, suggesting potential upside of 21% from the Dec. 9 closing price. Out of 13 analysts, 8 rate it a “Strong Buy,” 1 a “Moderate Buy,” and 4 a “Hold.”
Steel Stock #2: Commercial Metals Company
Commercial Metals Company, a leader in steel production and metal recycling, operates across North America and Europe, with its stock performance catching the eye of many market watchers.
At the Dec. 7 closing price, CMC trades at $62.26, showcasing an impressive run with a 24.4% gain year-to-date and a 36% increase over the past 52 weeks.
Behind this stellar performance lies a company actively shaping its future. CMC recently launched its Transform, Advance, Grow (TAG) initiative, a program poised to deliver financial benefits starting in fiscal 2025.
However, CMC's recent financial results paint a more nuanced picture. The fourth quarter fiscal 2024 earnings, released on Oct. 17, revealed net earnings of $103.9 million, or $0.90 per diluted share, on net sales of $2 billion.
While these figures represent solid performance, they fell slightly short of analyst expectations, with adjusted EPS missing estimates by $0.01 and revenue coming in below the projected $2.07 billion. A bright spot for shareholders was the 48% increase in cash distributions compared to fiscal 2023, reflecting the company's strong cash flow generation. All eyes will be on its next earnings release.
CMC's valuation metrics remain attractive, with a price-to-earnings (P/E) ratio of 15.41x and market capitalization of $7 billion, positioning it as a potential value play in the sector. For income-focused investors, CMC offers a forward dividend of $0.72, translating to a yield of 1.16%.
Goldman Sachs has taken a bullish stance on CMC, with a “Buy” rating and a price target of $75. The investment bank sees CMC as a way to "leverage any incremental U.S. construction and infrastructure spend," complemented by successful execution of cost reduction and value-enhancing projects.
This optimistic view is generally echoed by the broader analyst community, with a mean target price of $65.67 and potential upside of 6.42%. Out of 8 analysts covering the stock, 4 rate it a “Strong Buy,” while 4 maintain a “Hold” position, resulting in a consensus “Moderate Buy” rating.
Steel Stock #3: Cleveland-Cliffs
Cleveland-Cliffs, a major player in the steelmaking industry, has solidified its position as the largest flat-rolled steel producer in North America following its acquisition of Stelco Holdings on Nov. 1. This move expands CLF's presence into Canada and adds low-cost assets expected to deliver immediate benefits.
To fund the $1.8 billion acquisition, CLF issued senior notes maturing in 2025, 2029, and 2033. The company is also in talks with the Department of Energy for $500 million in funding to modernize its Middletown Works facility, targeting lower emissions and improved efficiency.
Despite these strategic advancements, CLF's stock performance has been under pressure. Shares are down 22.3% in the year-to-date and 29% over the past year. However, there has been a modest recovery recently, with the stock gaining 9% in the last 3 months.
The company's financial results for Q3 2024 highlight ongoing challenges. Cleveland-Cliffs reported an adjusted loss of $0.33 per share compared to earnings of $0.54 in Q3 2023. Revenue declined by 18.5% year-over-year to $4.6 billion, with steelmaking revenues dropping by 18.8%. On the positive side, cash and cash equivalents increased by 25.8% year-over-year to $39 million, though long-term debt rose to $3.77 billion due to the Stelco acquisition.
Looking ahead, CLF has trimmed its 2024 capital expenditure target to between $600 and $650 million, down $50 million from earlier projections.
Valuation metrics suggest potential value for long-term investors, with a forward price-sales ratio of 0.3x and a forward price-book ratio of 0.9x. The company’s market capitalization stands at $5.85 billion.
Goldman Sachs remains optimistic about CLF’s prospects, assigning it a “Buy” rating with a price target of $16, citing its ability to capitalize on U.S. construction and infrastructure spending while executing cost-reduction initiatives effectively.
The broader analyst consensus is more cautious, with a “Hold” rating based on recommendations from 12 analysts. Four rate it as a “Strong Buy,” 5 as “Hold,” and 3 as “Strong Sell.” The mean target price of $14.54 suggests upside potential of 18% from the Dec. 9 closing price.
Conclusion
Goldman’s confidence in Nucor, Commercial Metals, and Cleveland-Cliffs strongly tracks with domestic steel’s rebound. These stocks could be primed for gains with infrastructure spending, reshoring trends, and strategic initiatives driving potential growth. If Goldman’s call is right, now might be the perfect time to bet on the backbone of American industry.
