The fast-paced global macroeconomic recovery and resumption of industrial and manufacturing activities have revived the demand for steel worldwide. In addition, steel import tariffs in the United States and reduced steel production volume in China, which is the world’s largest steel manufacturer, have resulted in steel prices rising more than 200% since March 2020, as of July 9.
A recent, Senate-approved $1 trillion infrastructure bill, which allocates $110 billion for building roads and bridges, is expected (if passed into law) to drive steel demand in the United States over an extended period. Also, to make the U.S. steel industry more competitive, domestic steelmakers have asked President Biden to remove the import tariffs.
Steel prices are expected to increase in the coming months, given the rising market demand and current supply bottlenecks. Thus, Wall Street analysts expect shares of steel manufacturers Gerdau S.A. (GGB) and Schnitzer Steel Industries, Inc. (SCHN) to rally by more than 50% in the near term.
Gerdau S.A. (GGB)
GGB is a steel business that operates in four segments: Brazil Business; North America Business; South America Business; and Special Steel Business. The company sells iron ore, semi-finished and finished products, special steel products for auto equipment and agricultural machinery, and resells flat steel products. It is based in Sao Paulo, Brazil.
On August 19, GGB unveiled a simplification of its business structure in Mexico. Its subsidiaries Sidertúl, S.A. de C.V., and Aceros Corsa, S.A. de C.V, are scheduled to merge in the fourth quarter of this year. The merger should reduce operating costs and strengthen GGB’s financial structure.
On August 6, GGB announced that it has decided to invest R$6 billion ($1.16 billion) in the Brazilian state of Minas Gerais over the next five years. Regarding the investment, Marcos Faraco, Vice-President at GGB, said, “The new production capacity of hot-rolled coils will enable us to continue delivering steel products with higher added value to our clients. Meanwhile, the production expansion in structural profiles, a segment that we have pioneered in Brazil since 2000, is aligned with our strategy to develop the metallic construction segment, which will leverage productivity in the building, industrial and infrastructure sectors,”
In its fiscal second quarter, ended June 30, GGB’s net sales increased 118.8% year-over-year to R$19.13 billion ($3.68 billion). The company’s adjusted net income increased 1,664.4% from the prior-year quarter to R$3.37 billion ($0.65 billion). Its gross margin improved 20.1 percentage points from the same period last year to 28.3%.
A $1.75 consensus EPS estimate for the current quarter (ending September 2021) indicates a 1,844.4% year-over-year increase. Likewise, the $17.48 billion consensus revenue estimate for the current quarter reflects a 650.9% increase from the same period last year. Furthermore, GGB has an impressive earnings history; it topped the consensus EPS estimate in three out of four trailing quarters. The stock has gained 38.6% in price in the past year to close Friday’s trading session at $5.21.
The only Wall Street analyst rating GGB has rated it Buy. The 12-month median price target of $8.00 indicates a 53.55% potential upside.
Schnitzer Steel Industries, Inc. (SCHN)
SCHN is a steel manufacturing and ferrous and non-ferrous scrap metal recycling company that is headquartered in Portland, Ore. It operates through two segments: Auto and Metals Recycling, in which it collects, recycles, and resells scrap metals; and Steel Manufacturing, in which it produces steel products almost entirely resourced from the former business.
SCHN has now restarted production at McMinnville, Oregon Cascade Steel Mill, which was damaged by fire in May of this year. The reconstruction was finished ahead of schedule and the mill has resumed operations with a full workforce. The reopening of the Cascade Steel Mill is expected to boost the company’s revenues in the coming months.
On August 12, SCHN signed a definitive agreement with metal recycling business Columbus Recycling to acquire eight of the latter’s operational facilities. The agreement should enable SCHN to boost its production capacity to meet the rising demand for recycled metals.
SCHN’s revenue increased 103.8% year-over-year to $820.72 million in its fiscal third quarter, ended May 31. The company’s net income improved to $65.44 million, indicating a substantial increase from its negative year-ago value. Its adjusted EPS came in at $2.20, indicating a 4,300% year-over-year increase, while its adjusted EBITDA increased 410.5% from the prior-year quarter to $97 million.
Analysts expect its EPS to improve 142.1% year-over-year to $1.38 in the current quarter (ending November 2021). The Street’s $2.7 billion revenue estimate for the current year (fiscal 2021) indicates a 57.8% year-over-year increase. In addition, SCHN has topped consensus EPS estimates in each of the four trailing quarters.
SCHN’s stock has gained 125% in price in the past year and 48.5% year-to-date.
Two Wall Street analysts that rated SCHN have rated it Buy. In addition, the 12-month median price target of $72.00 indicates a 51.93% potential upside.
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GGB shares were trading at $5.39 per share on Tuesday afternoon, up $0.18 (+3.45%). Year-to-date, GGB has gained 19.30%, versus a 21.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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