Current valuation metrics
Previously in this series, we did a comparative analysis of various steel companies. Now, we’ll look at their current valuation metrics. There are several valuation metrics that we can use in such valuations.
For companies in cyclical industries like steel, EV (enterprise value) to EBITDA (earnings before interest, taxes, depreciation, and amortization) is the preferred valuation metric.
The graph above shows steel companies’ forward EV/EBITDAs as of September 18. ArcelorMittal (MT) has a forward EV/EBITDA multiple of 4.83. The company has historically traded at a discount to other steel companies. For now, ArcelorMittal’s higher debt levels and mining exposure seem to weigh heavy on investors’ minds.
AK Steel (AKS) has a forward EV/EBITDA multiple of 7.08. AK Steel has seen a huge correction this year, partially due to the company’s higher leverage ratios. As market conditions don’t seem like they will improve anytime soon, investors have cut their exposure to companies with higher leverage ratios.
U.S. Steel Corporation (X) has a forward EV/EBITDA multiple of 4.3. The company faces serious headwinds in its tubular operations. Looking at the company’s business prospects, this lower valuation could be justified.
Nucor has traded at a premium
At 7.37, Nucor (NUE) has the highest forward EV/EBITDA multiple in our coverage universe. Nucor commands a premium due to its comfortable leverage ratios and higher EBITDA margins. The company has historically traded at a premium as compared to other steel companies.
Steel Dynamics (STLD) has a forward EV/EBITDA multiple of 6.12. The company has historically traded at a discount to Nucor. This is possibly due to Nucor’s relatively lower leverage ratios and stable EBITDA margins.
Together, Nucor and Steel Dynamics form ~8.9% of the SPDR S&P Metals and Mining ETF (XME).
In the next part, we’ll explore Wall Street’s views on steel companies.