advertisement
The steel industry has surged this year on strong demand, especially from China and other emerging economies. And steel stocks have benefited from a global wave of consolidation that Wall Street expects to continue.
Can the industry's good times keep rolling? Steel analyst Mark Parr of KeyBanc Capital Markets thinks they can.
"The real key for the stocks right now is which direction the economy is going in next year," Parr said today on CNBC's "Squawk on the Street." "The thing that we can definitely say is that the industry continues to act more rationally. And with the stocks selling at barely above four times EV/EBITDA, there's plenty of room for these things to continue to move on the upside." (EV/EBITDA is a widely used valuation ratio, in which EV is enterprise value and EBITDA is earnings before interest, tax depreciation and amortization.)
Parr has a "buy" rating and a $90 price target on United States Steel (X, news, msgs).
CNBC video: Parr's outlook for steel
In a recent note to clients, Parr raised his 2006 earnings-per-share estimate for U.S. Steel to $11.20 from $8.65, citing "upside momentum in the company's tubular and European operations, augmented by further recovery potential in the domestic flat-rolled business through the balance of the year."
"Earnings will likely benefit from lower natural gas prices, stronger tubular pricing and further pricing recovery in both domestic and European flat-rolled business," Parr also wrote in his Aug. 10 report.
More from MSN Money
U.S. Steel
The Pittsburgh company is one of the nation's biggest integrated steelmakers.U.S. Steel has mills in seven states and in Slovakia. It produced about 21 million tons of steel last year; more than 15 million tons were produced in the United States. Its steel is produced primarily for use in the automotive, construction and petrochemical industries.
Stock Charts (Year)
United States Steel
Bank of America analyst Kuni Chen this week said the steel industry has focused on lowering inventories, and that steel prices and earnings per share should climb in 2007. "Demand is expected to improve over the next six months," said Chen, whose top pick in the sector is U.S. Steel.
Third-quarter profit was sharply higher, the company said Oct. 31. Results in the year-ago period were weakened by the rebuilding of two major blast furnaces. The company also said it would raise its quarterly dividend by 33% to 20 cents.
Earlier this decade, U.S. Steel acquired National Steel, the industry's fourth-biggest producer. The deal doubled the company's market share. Some analyst think continued consolidation is needed to keep the domestic industry competitive.
Shares of U.S. Steel and other steel makers got a lift last summer from the announced merger of the world's two biggest steel makers, Arcelor and Mittal Steel.
U.S. Steel should draw plenty of buyout interest, but the company stands a good chance of remaining independent, Parr said. "For U.S. Steel, probably the biggest single issue will be the union. Anybody who wants to make a move on U.S. Steel is going to have to get cooperation from the union upfront before a credible offer can emerge."
It won't be easy for a foreign steel company to break the union as part of a buyout plan, Parr added. "The (United Steelworkers) union is in very good shape right now. The rank and file is making good money and they have a very secure future. It's not a situation where you think about breaking (the union) over the near term."
According to Zacks, the average brokerage recommendation on United States Steel is "hold."
United States Steel on July 5 was rated 9 out of 10 on StockScouter.
Rate this Article
High