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Steel Companies’ Valuations Revert to Mean in June


Nov. 20 2020, Updated 5:31 p.m. ET

Steel companies’ valuation

For companies in cyclical industries such as the steel industry, the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.

In this part, we’ll look at steel companies’ forward EV-to-EBITDA multiples and compare them with long-term averages.

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Mean reversion

Steel companies were trading above their long-term trading multiples between February and June this year. This was due to the sharp rally in this sector. Also, analysts were slow in increasing their forward earnings estimates for steel companies.

However, we saw most steel companies’ valuations revert to their long-term means as can be seen in the above graph. Apart from AK Steel (AKS) which is trading 8% above its five-year forward EV-to-EBITDA multiples, most steel companies that we cover are in a range of 5% from their five-year multiples. Note that markets (IJH) could be valuing AK Steel at a premium due to a changed strategy—it’s positioning itself as a value-add steel player. Read What AK Steel’s New Strategy Could Bring for Investors This Year? to learn more.

Nucor (NUE) and Steel Dynamics (STLD) are trading roughly 5% below their long-term trading multiples. You can see this in the above graph. ArcelorMittal’s (MT) current valuation multiples are also similar to its long-term average.

U.S. Steel Corporation

U.S. Steel Corporation (X) traded at a massive premium to its long-term trading averages. Now, it reverted to its long-term average valuation. The recent correction in U.S. Steel Corporation’s stock price combined with earnings upgrades helped U.S. Steel Corporation’s valuation multiples look much more reasonable.

Meanwhile, there could be more upside to U.S. Steel Corporation’s fiscal 2016 earnings. Read Is U.S. Steel Corporation in for an Upwards Earnings Revision? to learn more.

You can also visit Market Realist’s Steel page for more updates on the industry.


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