Time to Add Some Risk: Upgrading Steels; UPGRADING US Steel and
Olympic Steel; Revising Estimates and Raising TPs
We are upgrading and increasing target prices and estimates for
a number of U.S. steel stocks under coverage, as we believe 1) the
resolution of the Fiscal Cliff, coupled with 2) attractive steel
industry fundamentals and 3) upside risk to China, suggest the
sector is poised for a bounce.
Steel Fundamentals Support a U.S. Bounce: With the Fiscal Cliff
close to resolution, we now focus attention on near-term industry
fundamentals, which we believe are positive for the U.S. steel
sector in 2013. Recent proprietary channel checks support our view
that improving U.S. demand (e.g. autos, industrial production),
disciplined supply (i.e. muted imports), and low inventories should
support higher prices. We also see a number of upside risks which
could surprise investors in 2013, including 1) a potential
non-residential construction recovery (non-residential typically
lags housing by 9-12 months and 2) cost containment, as 2013 should
see lower overall raw material costs (met coal, iron ore) vs.
2012.
China Provides a Floor: We believe an improving Chinese economy
will provide a floor for global steel prices, as it 1) supports raw
material prices, thereby raising the cash cost floor of production,
and 2) limits the widening of the price spread between domestic and
Chinese material, translating into benign import levels through at
least 1H'13.
In a Risk On Trade Environment, Both Steel Mills and Service
Centers to Benefit: We believe investors who have been staying
cautious through the end of 2012 will revisit "Risk On" trades in
2013, with steel stocks near the top of the list. Looking at
returns from Jan. to April over the past 10 years we believe all
steel stocks can be "winners" in this scenario, but service centers
have outperformed historically.
Key Risks: 1) Reversal in Chinese Growth, 2) falling raw
material prices, 3) rising imports and 4) US economic slowdown
Rating Changes:
US Steel ($23.85 TP $30, Upgrade to Outperform from Neutral)
Olympic Steel ($22.14 TP $27, Upgrade to Neutral from
Underperform).
Top Stock Picks:
Reliance Steel (RS, OUTPERFORM), US Steel (X, OUTPERFORM), Nucor
(NUE, OUTPERFORM), AK Steel (AKS, OUTPERFORM), Metals USA (MUSA,
OUTPERFORM).