Are Steel Imports Becoming a Whack-a-Mole Game?
Slowdown
The US steel industry has been in a severe downturn, and the operating environment might not improve anytime soon. So what should investors do in this bleak scenario?
Look for strong balance sheets
The graph above shows the net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) for various steel companies. Companies with strong balance sheets, including Nucor (NUE) and Steel Dynamics (STLD), are better placed to survive the prolonged slowdown compared to their peers with high financial leverage.
NUE and STLD have outperformed other major steel companies since the beginning of 2015, as we saw in Part 1 of this series. Nucor is the only US steel company to carry an investment grade (BND) credit rating. It also carries a healthy dividend yield (VYM) of 3.8%.
Automotive exposure
Steel companies with a high exposure to the automotive sector are better placed to handle the import pressure. Automotive companies generally prefer domestic steel companies for their steel needs.
ArcelorMittal (MT) is the leading steel supplier to the automotive sector. AK Steel (AKS), which gets more than half of its revenues from the automotive sector, has been among the best performing steel companies this year.
Earlier this year, while analyzing the US steel industry’s 2016 outlook, we explored the possibility of AKS being a wild card in the steel industry. However, AK Steel’s high leverage ratios increase the company’s risk profile.
You can also read What’s Wall Street Saying About the Steel Industry? to see what analysts are recommending for various steel companies.
In our next series, we’ll explore how severe the global steel overcapacity is and what it would mean for steel investors. In the meantime, you can find out more about steel companies’ recent price movements and outlook in our series Do February Steel Indicators Offer Signs of Hope to Battered Steel Industry?
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