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March 27, 2017, 11:04 A.M. ET
U.S. Steel: No Really. Steel’s Gonna Be Just Fine, Morgan Stanley Says
By Ben Levisohn
It’s been a painful month for steel stocks like U.S. Steel (X), AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD), with stocks getting hit by fears that infrastructure spending will go the same was as health care, and concerns about global growth.
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To those concerns you can also add falling East Coast export prices, say Morgan Stanley’s Evan Kurtz and team, and falling coal prices, which would create a “meaningful drop in the steel cost curve [that] will likely create an additional headwind for global steel prices.” They’re bullish anyway. Kurtz explains why:
Despite these tactical concerns, any cost deflation related price weakness should have little impact on our mid-cycle margin view, which drives our price targets. While price cycles will never disappear, we believe structural improvements in the form of trade barriers and China supply side reform should allow margins to remain higher on average going forward. Also, we think US mills will benefit from higher volumes and better fixed cost absorption in 2017 as demand for steel in the US is tracking favorably, import pressures will likely remain benign as a result of recent and coming duties, and service center inventories are low. We would view any potential weakness in the space as a buying opportunity and highlight NUE, STLD and X as our top picks.
Shares of U.S. Steel have dropped 3.1% to $31.81 at 11:00 a.m. today, while Nucor has fallen 1.8% to $58.70, Steel Dynamics has declined 1.3% to $33.44, and AK Steel has tumbled 3.6% to $6.91.