A Glimmer Of Gold In SteelBy
It's awfully late in the recovery to be buying cyclical stocks--especially when the Fed is
ratcheting up interest rates. Such thinking is pushing down steel stocks, even as Big Steel enjoys its biggest boom in 20 years. Industry leader U.S. Steel, for example, has seen its stock price tumble $9, or 20%, since reaching $44 in September.
So, is that it for the ferrous stocks until the next economic recovery? Maybe not. Growing demand for steel around the world is soaking up excess capacity and creating a tight market. The upshot could be spiraling prices in 1995. For Big Steel, which for much of the past decade has wallowed in rust-colored ink, this could mean soaring profits. And for investors, it could spell hot stocks. "Throughout 1995, it's going to be a very strong environment for these companies," says Peter Anker, metals analyst at NatWest Securities.
FINGERS CROSSED. Already, steel companies have announced price hikes averaging 4% that kick in on Jan. 1. With markets tightening and prices rising in Asia and Europe, they're widely expected to stick. Meanwhile, the industry is hammering out contract price hikes of 7% to 10% with auto makers. Those numbers may sound modest. But their impact on earnings is immense. For each 1% rise in steel prices, the average Big Steel company adds 30 cents to 50 cents per share in earnings. That could result, say analysts, in a 1995 earnings boost of 100% to 500%.
You can forget about the party if interest rates soar and growth stalls. But in an expanding economy, steel's prospects look stellar. After a decade of downsizing and modernizing, the industry is strong. It wiped out nearly a third of its aging capacity in the 1980s, and the cheap dollar is helping to make it competitive worldwide. Chrysler, for example, now ships coils of American steel to make Jeeps in Europe.
Which stocks should do best? Consider No.3 steelmaker LTV. During seven years of bankruptcy that ended last year, LTV invested $2.5 billion in plants while discharging much of its debt. Now, LTV rolls sheet steel off its revamped mill in Cleveland at the industry's lowest cost. Thomas Van Leeuwen, steel analyst at CS First Boston, predicts earnings will grow from $1.15 per share this year to $2.85 next year, and the stock will rise.
The industry bellwether is the U.S. Steel group of USX. As the only steel stock that pays a dividend, now yielding 2.9%, it attracts the largest group of general investors. But they jump off in a hurry, as when USX stock fell $3 after announcing glum third-quarter results. Still, it should fare well in 1995. A cheaper stock is No.2 maker Bethlehem Steel. Outages for maintenance have punished earnings this year. But Bessie should be rolling flat out next year.
For those thinking about dipping into smaller-cap stocks, National Steel and AK Steel offer sizzling prospects. Price hikes boost National more than any other company in the industry, with each dollar rise in steel prices driving up earnings per share by 67 cents. J.P. Morgan projects 1995 earnings per share at $4, which translates into a heady multiple for a stock trading at $16. AK Steel, where Chief Executive Thomas Graham--known as the Smiling Barracuda--has hacked costs to the bone, boasts the highest operating profits per ton in the industry. Issued just last spring, its stock trades on NASDAQ.
MINI INVASION. Contrarians might want to take a look at the minimills--companies such as Nucor and Birmingham Steel, which make steel by melting scrap. Many investors steer clear of them during booms, since higher prices drive up the cost of scrap. But the leading minis are reaching into fresh markets. Nucor is building new minimills and venturing into the iron business, while Birmingham, with its purchase and expansion of American Steel & Wire, is busting into the high-end market for auto components.
Unlike the large integrated companies, the minimills perform at their best in down markets. For those investors who think the economy will keep growing, however, Big Steel could provide tons of excitement.
A Ton Of Possibilities COMPANY 1994 EPS* 1995 EPS COMMENTS BETHLEHEM $0.58 $3.38 Repairs have bitten into earnings, STEEL keeping stock cheap BIRMINGHAM 1.99 2.63 Pushing hard into higher-margin STEEL** automotive steel LTV 1.13 2.70 Emerged from seven-year bankruptcy with low debt, modern plants NATIONAL -0.18 3.92 When prices rise, its earnings per STEEL share soar higher than others NUCOR 2.30 3.52 Stock is high, but Nucor hasn't had a losing quarter since 1965 U.S. STEEL 1.72 4.81 Only integrated steel company GROUP with a dividend *Earnings per share estimates **Fiscal year ends in June DATA: NELSON PUBLICATIONS
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