NEW YORK Wall Street analysts have turned upbeat on prospects for the U.S. steel sector, highlighting U.S. Steel Corp. and ArcelorMittal SA as promising picks due partly to better pricing trends.
Pittsburgh-based U.S. Steel could become one of the most profitable North American steelmakers vs. one of the least profitable currently if it expands into direct-reduced iron and more electric-arc furnace business, analysts at Zurich-based Credit Suisse Group AG said in a note.
U.S. Steels price target has been doubled to $50 per share and its rating adjusted to "outperfom" from "underperform," Credit Suisse said. "Implementation is complicated, but success could mean a multibillion-dollar earnings opportunity. ... We are backing (chief executive officer) Mario Longhi on execution."
The bullish stance on U.S. Steel follows a similar call from Goldman Sachs Group Inc. earlier this month, with the New York-based investment bank calling U.S. Steel "one of the best growth stories in our steel coverage" and its "top pick" in the steel sector, highlighting cost-cutting drives and the companys profitable flat-rolled division.
"The U.S. flat-rolled steel market is in the best shape it has been in since the financial crisis, and (U.S. Steel) has one of the highest exposures to this product," Goldman Sachs analyst Sal Tharani wrote.
The U.S. flat-rolled market is in a deficit after seven years of surplus, he said, adding that "unprecedented consolidation" could also boost U.S. Steels prospects.
Zurich-based UBS AG also upgraded the worlds largest steelmaker, Luxembourg-based ArcelorMittal SA, to a "buy" from a "sell" rating Aug. 26, citing resilient U.S. steel prices backed by trade protectionism and better utilization rates. UBS expects ArcelorMittals North America unit to sustain higher profitability.
Other steel companies in the sights of analysts include Fort Wayne, Ind.-based Steel Dynamics Inc. (SDI), which Credit Suisse dubbed an "attractive longer-term holding" after noting "recent share price outperformance" in a report issued last week.
"Investor interest in the flat-rolled sector has risen significantly in recent weeks after (second-quarter) results," New York-based Cowen & Co. LLC wrote in an Aug. 25 note. Fear over potential trade cases could dampen any domestic pricing drag from cheaper imports, Cowen analysts said, also citing recent $30- to $40-per-ton price increases on steel plate products by ArcelorMittal, Lisle, Ill.-based SSAB Americas and Charlotte, N.C.-based Nucor Corp. (amm.com, Aug. 22).
"Plate pricing has been on a nearly yearlong march higher, from under $700 (per short ton) last August to the current level of $850 (per ton)," the Cowen analysts wrote.