I think all of you may want to consider this article.
I work in the steel industry in my home town.
I can tell you that the steel industry is now starting
to pick back up. The reason for the terrible losses in
this industry are because of the foreign imports.
This problem is being faced and at least managed at this
point.
Anyway look at this arictle and see what you think.
Pros Buy Steel Stocks at Scrap-Metal Prices
By Vito J. Racanelli
Less than a year ago, the decidedly unglamorous steel stocks were hotter than the inside of an electric arc furnace, thanks to robust product demand and merger fever. The Dow Jones steel industry group was up 29% in late March, making it the best performing of the 95 Dow Jones industry groups at that point in the year.
Since then, it's been a disaster. Shares of the major names like USX Corp.'s USX-U.S. Steel Group, LTV and Bethlehem Steel have lost nearly half their value. Some stocks now trade at levels not seen in more than five years.
What's the problem? In a word, imports. With the dollar strong until recently and demand evaporating in emerging markets, cheap foreign steel grabbed some 30%-40% of the U.S. market, up from about 20% in 1997. Inevitably, prices plunged. Hot-rolled steel, for example, is now at about $250 per ton, down almost 30% from its $350-a-ton price last spring.
Not surprisingly, industry earnings have tanked. According to First Call, a consensus of Wall Street analysts expects fourth-quarter steel company profits to be down by more than 50%, and some firms will show losses. In 1999, their earnings are projected to fall by about 17%.
Yet even as these companies get set to report their worst quarterly results in many years, some Wall Streeters have turned more sanguine on the group. They say that U.S. steel demand remains strong and that imports' market share will drop. Furthermore, as high inventories dwindle, steel producers may post price increases as early as the second quarter.
Although the group has recovered a bit -- it's up a healthy 6% so far this year -- it's at historically low valuation levels, and most of the bad news is already discounted, says Merrill Lynch analyst Robert J. Schenosky. Earlier this month he upgraded several steel stocks to Buy ratings. They include Allegheny Teledyne, USX-U.S. Steel Group, and LTV Corp.
The big integrated steel mills and minimill Nucor are selling at about a 50% discount to their replacement value, adds Michael Gambarella, an analyst at J.P. Morgan. That's a far cry from the 20% premium to replacement value these stocks garnered in the halcyon days of 1994.
The stocks also are at a sharp discount to the broad market. Based on current earnings estimates, big integrated producers like U.S. Steel and Bethlehem change hands at a mere six times 1999 First Call consensus earnings expectations. The minimills trade at midteen P/Es -- much lower than the S&P 500's multiple north of 25 times next year's projected earnings.
"You want to buy these stocks when things are at their worst," Gambarella says.
And there are some signs that things will improve for steel companies this year -- perhaps as early as the second quarter, claims Kevin Holt, an analyst at Strong Capital Management.
For example, the U.S. has already slapped duties on certain steel products and is set to issue more antidumping tariffs next month. That's going to scare off foreign producers, says Holt. Merrill's Schenosky is looking for imports to drop to the more normal levels of 1997.
Meanwhile, demand remains robust. U.S. GDP growth was probably close to 4% in the fourth quarter of 1998, and 1999 growth might turn out to be much stronger than economists expect. (See Weekday Trader, "Strong US Growth Could Mean Higher Rates," January 13.)
"The American industrial machine is surging on," observes Mark Millett, vice-president at minimill Steel Dynamics. He adds that increasing demand has caused his company's lead time on new orders to double to seven to eight weeks this year, from three to four weeks.
Over time, that should give domestic steel companies more pricing power. Some stainless steel producers, like Armco, J&L Specialty Steel and Allegheny Ludlum, already have begun to boost prices this month. J.P. Morgan's Gambardella adds that he expects the environment to improve enough to allow Nucor -- an industry price leader -- to raise prices on hot-rolled sheet steel early in the second quarter. "That would be a psychological boost," he says.
It won't take much of a price increase to help these companies' bottom line significantly, Schenosky figures. He says every percentage-point move in the average annual price of steel product generates an earnings swing of 25 cents a share for LTV, 42 cents for USX, 31 cents for Nucor and 28 cents for Bethlehem. Schenosky is looking for hot rolled steel to rise to $280-$300 per ton by the end of the yea -- a 12%-25% increase over current prices. That could mean much higher earnings for the major suppliers.
Two factors will boost demand and prices in the first half, says Gambardella. First, General Motors, a huge consumer of steel, will likely be building inventories in advance of labor negotiations this summer. Other customers may also build their own inventories ahead of third-quarter labor negotiations for the major integrated steel mills, he adds. (Because of the risk of a steel strike, he likes stocks like Nucor, a nonunion shop, and AK Steel Holding, whose labor contracts don't expire until next year.)
Some investors have already jumped on the steel bandwagon, among them Strong Capital Management, which bought U.S. Steel, Nucor and AK Steel in the fourth quarter. Analyst Holt believes these stocks' downside is limited.
Alan Wapnick also has been nibbling at Bethlehem Steel for the Lexington Value Fund. He thinks the group will benefit from much easier earnings comparisons starting in the third quarter. Jim Vail, an analyst at Lexington, adds that the money management firm will be looking to buy more steel stocks soon.
Unlike Internet stocks, investors won't wow the folks in the chat rooms by saying they're buying the steels. But also unlike Internet shares, these stocks are dirt-cheap.
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