The art of stock investing lies in identifying the right equities to buy. One effective approach is focusing on core economic sectors – industries that sustain the foundations of modern life. Among these, basic commodities like steel play a crucial role, serving as the building blocks of countless essential activities.
While steel is highly cyclical, it’s also a key material in multiple essential industries – the automotive, machinery, and construction markets, to name just a few, all depend on steel. This makes steel manufacturers a sound choice, especially when the economic forecasts start looking up.
This is the background behind Goldman Sachs’ current take on the industry. “In our view, the prevailing sentiment towards the US steel industry seems pessimistic given concerns on global over supply and weak but improving pricing,” firm analyst Mike Harris opined. “We are more positive given our belief that both cyclical (e.g., steady demand and lower interest rates) and structural (e.g., fiscal stimulus and favorable trade policy) factors could drive earnings growth for the domestic steel industry despite a weaker global backdrop.”
Harris follows that ‘more positive’ belief to make positive calls on two steel stocks in particular, suggesting that investors treat them as ‘Buys’ amid an improving fundamental situation. We’ve used the TipRanks database to uncover what sets these names apart. Here are the details.
Cleveland-Cliffs(CLF)
The first stock on our list here is Cleveland-Cliffs, the largest producer of flat-rolled steel in North America. The company is the third-largest steel firm in the US, and in addition to flat-rolled steel, its product line includes steel products such as electrical steel, plate, carbon, and stainless. Furthermore, the company is the largest supplier in the US market for automotive-grade steel products and offers hot and cold stamping and tooling solutions.
Cleveland-Cliffs traces its roots back to 1847 and is still based in Cleveland, Ohio. The company is involved in all aspects of the steel industry, not just the finished products; this includes mining the iron ore, producing the pellets and reduced iron needed as the base for steelmaking, and processing ferrous scrap for steel recycling. The company employs approximately 30,000 people and operates across the US and Canada.
Recently, Cleveland-Cliffs completed its acquisition of the Canadian steel firm Stelco. Stelco will continue to operate as a wholly-owned subsidiary; Cleveland-Cliffs paid $2.8 billion for the acquisition.
While this industrial stalwart holds an important position in the manufacturing sector, it has also seen falling revenues and earnings in recent quarters. Cleveland-Cliffs generated $4.6 billion in revenues during 3Q24, the last period reported. This figure was down 18% year-over-year and missed the forecast by $120 million. At the bottom line, CLF’s non-GAAP EPS came to a net loss of 33 cents per share and missed the estimates by 2 cents per share. The company reported steel shipments of 3.8 million net tons during the third quarter. We should note here that Stelco, whose third quarter marked its last quarter prior to the acquisition, shipped 639,000 tons of steel in Q3 and generated US$480 million in revenues.
In his coverage for Goldman Sachs, Harris lays out several reasons for a positive outlook on Cleveland-Cliffs, including the company’s ability to successfully carry out vital projects. He writes of the steel firm, “We are positive on CLF for the following reasons: 1) Successful execution of self-help initiatives geared toward cost control (e.g., cost down $40/mt QoQ in 3Q24); 2) Potential earnings growth (i.e., at least $600mn annually) from successful execution of value-enhancing projects at Middletown, Butler & Weirton; and 3) Margin expansion potential (e.g., up roughly 410 bps through 2026), which assumes successful execution of a $120mn synergy extraction from the Stelco acquisition.”
These comments back up Harris’ Buy rating on CLF, while his $16 price target points toward a one-year upside potential of 24%.
This stock has a Moderate Buy consensus rating, based on 7 recent reviews that include 4 to Buy and 3 to Hold. The shares are priced at $12.90 and have an average target price of $15.96, almost matching the Goldman view. (See CLF stock forecast)
Nucor(NUE)
Next up is Nucor, the largest of the US steelmakers. With a market cap of more than $36 billion, the company is significantly larger than Cleveland-Cliffs – although Nucor, founded in 1955, is also significantly younger. The company is a diversified steel and steel product manufacturer, with locations across the US, Canada, and Mexico. On the product side, Nucor is a major supplier of merchant bar and rebar, engineered bar, structural steel components, carbon plate steel, and sheet steel, as well as specialty steel products used in a wide range of industrial and construction applications. In addition, the company is a major processor of steel scrap, a key recycling function in the industry.
Nucor controls its operations from its North Carolina headquarters and operates through a family of brands, all well-known names in the steel and construction industries.
Similar to Cleveland-Cliffs above, Nucor has also seen its earnings and revenues trend down in recent quarters. In the last reported quarter, 3Q24, Nucor predicted that its upcoming Q4 results would continue this trend. The company cited a combination of factors as causing the fall in revenues and earnings, including decreased sales volumes and lower average selling prices which negatively impacted earnings in the steel mills business segment.
We should note, however, that Nucor beat the forecasts at both the top and bottom lines in the 3Q24 financial results. The company’s revenue came to $7.44 billion, which beat expectations by $210 million even as it fell more than 15% year-over-year. On earnings, the non-GAAP EPS of $1.49 was 8 cents per share better than had been looked for.
Goldman analyst Harris lays out why investors should get behind this name. He writes of Nucor, “We are positive on NUE for the following reasons: 1) Given the company’s market leading position in most of its products produced, we believe that NUE is well positioned to leverage any incremental steel demand such as the anticipated rapid growth of data centers; 2) Potential margin uplift of ~260 bps through 2026 driving a CAGR of 15% for EBITDA; and 3) Solid balance sheet with leverage averaging <0.2x over the forecast period, providing future growth optionality.”
Harris puts a Buy rating on NUE shares, along with a $190 price target that implies a 12-month upside potential of 22.5%.
The Street’s analysts have given this stock 10 recent reviews, and their breakdown of 7 Buys to 3 Holds adds up to a Moderate Buy consensus rating. The shares are currently trading for $154.98 and have an average price target of $179.89, suggesting that a share price gain of 16% is in store for the year ahead. (See NUE stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
