Joe and Jim, did you guys see Money's article on the steel stocks tonight? Joe, I remember you were interested in AS and Jim has a
steel stock that he likes.
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> visit moneydaily.com.
>
> Tuesday, June 16, 1998
>
> Steel stocks may be a bargain
>
> But many analysts caution that price increases needed
> to make them shine may not materialize.
>
> Michael Brush
>
> Even before the current panic over Asia and earnings
> tanked the stock markets, just about any stock
> connected with basic materials had been severely
> punished.
>
> That's because as the prices of commodities have
> collapsed, investors have figured that companies
> producing things like wood, paper and steel don't
> stand much of a chance of increasing revenue and
> profits.
>
> But by now, the steel stocks have been driven down to
> their lowest levels in 20 years, and it is time to
> start buying them, says Kenneth Hoffman, a steel
> analyst with Prudential Securities. Valuations are so
> cheap that some steel companies are thinking about
> simply taking themselves private.
>
> Hoffman, who likes to go out on a limb when making
> forecasts about the sector, believes several factors
> are coming together to turn steel prices around. And
> that, he says, will boost the stocks soon.
>
> He says that declining imports, soaring construction
> demand and solid orders from the auto sector are
> starting to make the markets for steel tight enough
> that some producers will begin raising prices this
> summer.
>
> His reasoning: Japan and Korea have cut back on
> production, which has caused their inventories to
> drop. Russia is closing down production. And growth in
> Latin America and Europe has been so strong that
> producers there -- which are behind about 70 percent
> of the foreign shipments to the U.S. -- are selling
> more domestically and sending less here. On top of
> that, a strong U.S. economy is adding to demand for
> steel.
>
> All this means that prices for flat rolled steel --
> used in things like cars and appliances and makes up
> 75 percent of demand -- will increase 3 percent to 5
> percent in July or August, Hoffman says. Structural
> steel used in construction and stainless steel account
> for most of the rest of demand.
>
> "What you are seeing is really good earnings, but
> these companies are getting less and less respect,"
> says Hoffman. "The group is terrific, but many people
> don't want to believe it."
>
> Indeed, many of Hoffman's fellow analysts don't see a
> steel price hike in the cards.
>
> Merrill Lynch steel analyst Robert Schenosky, for
> example, is not convinced that production cuts in the
> Pacific Rim have been big enough to sustain world
> prices. He is still recommending some steel stocks, so
> his outlook is not entirely bleak. But he thinks Asian
> imports and U.S. domestic mini-mills will add enough
> supply to put downward pressure on prices for flat-
> rolled and structural steel later this year.
>
> "The group is very cheap but it won't outperform
> without prices going up, and I don't see that
> happening for the rest of the year," agrees Scott
> Morrison, a Donaldson, Lufkin & Jenrette steel analyst
> who downgraded several stocks in the sector last week.
> He thinks prices may start to improve in 1999, which
> may cause steel stocks to start turning around in the
> fourth quarter.
>
> In case you think Hoffman's reasoning is right, we
> came up with a couple of promising steel companies. To
> do so, we turned to IBES International, a company that
> analyzes earnings estimates. We wanted to find cheap
> steel companies that also have strong upward earnings
> revisions, a sign that analysts think good things are
> on the way.
>
> To do so, we first screened out any steel producer for
> which an analyst had cut estimates in the last month. From that group, we
> took companies that had a forward price earnings ratio less than their
> long term growth
> rate, a measure often used by analysts to find
> undervalued stocks. Next, we looked for companies that
> had a good history of meeting or beating earnings
> estimates -- meaning they may be less likely than
> other firms to turn in bad surprises in the future.
>
> We came up with two companies: Bethlehem Steel (NYSE:
> BS) and Armco Inc. (NYSE: AS). By the numbers,
> Bethlehem Steel looks stronger. In the last month, the
> company's 1998 estimates have been moved up nearly 9
> percent, and estimates for 1999 are up about 6
> percent. What's more, the company has beaten
> estimates by anywhere between 15 percent and 110
> percent in the past five quarters.
>
> Estimates for Armco are up 1.7 percent for 1998 and
> about 5 percent for 1999. And if you take out the last
> quarter of 1997, when the company missed estimates by
> 12 percent, it has beaten estimates by 14 percent to
> 47 percent in the past year.
>
> Another good thing about these companies is that each
> one is expected to have better earnings for reasons
> that have little to do with price increases. At Armco,
> which makes stainless steel, major spending on new
> equipment is finally starting to pay off. Bethlehem
> Steel has been improving earnings by closing divisions
> that were losing money.
>
> Because these two companies already look strong, the
> steel price increase expected by Hoffman, if they pan
> out, would be icing on the cake.
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