British Steel: A Sterling Buy?Jeffrey M. Laderman
As interest rates fall in Europe, investors are hunting for companies that ride the rising economic tide that lower rates should bring--such as British Steel. Since last fall, the company's American Depository Receipts, which trade on the Big Board, have jumped from 8 to 12 1/4. But their run is far from over.
After a 1992 restructuring that included dropping the dividend, British Steel emerged as one of the world's lowest-cost integrated steel companies. Europe's steel industry is rife with overcapacity, but talks are going on in the European Community that should result in closing 16% of capacity.
Analyst Robert Schenosky at Kemper Securities doesn't expect the company to be in the black until next year. Still, he says it's, well, a steal: British Steel sells for 44 for every $1 of revenue vs. 60 for Bethlehem Steel and 82 for USX-Steel Group. British Steel's debt is only 20% of capital, and unlike its U.S. counterparts, it has no unfunded pension liabilities. Still, the ADRs trade at just 35% of book value.
Value investors love the stock. Wellington Management--which manages Vanguard's Windsor and Wellington mutual funds--holds over 10 million ADRs. "At the bottom of the global recession, invest in a good cyclical company," says Paul Lesutis at Brandywine Asset Management, with 1.9 million ADRs. "This is it."