Among the steel stocks we’re covering in this series, Steel Dynamics (STLD) has received the highest percentage of “buy” or equivalent recommendations from analysts (70%). According to the consensus estimates compiled by Bloomberg, Steel Dynamics carries a one-year price target of $30.43, which represents a 29.5% upside over its closing price on September 16.
The graph above shows recent Wall Street analyst recommendations for Steel Dynamics. On September 15, Jefferies cut STLD’s price target from $31 to $28 while maintaining its “buy” recommendation. Berenberg is among the most bullish brokerages on Steel Dynamics and has set a one-year price target of $35, which represents a 49% upside over current price levels.
Steel Dynamics might not see many downgrades, unlike U.S. Steel (X) and AK Steel (AKS). Steel Dynamics has one of the most diversified end-market exposures among other steel companies. Remember, diversified end-market exposure reduces a company’s risk profile, as weakness in one customer segment doesn’t have a big impact on earnings.
Steel Dynamics has a healthy balance sheet. The company’s financial strength should help it survive the current steel industry slowdown. It should do better than the more financially levered companies such as U.S. Steel and AK Steel if steel market conditions worsen in coming months.
Also, Steel Dynamics and Nucor (NUE) have lower operating leverage because these companies produce steel through electric arc furnaces. Lower operating and financial leverage would likely benefit both these companies in times of market turmoil.
You can read the Market Realist series What Investors Should Know about Steel Plays to explore the different steelmaking techniques used by steel companies. As the US steel industry’s (XME) fundamentals have deteriorated over the past couple of months, you might also want to check out the series Why the US Steel Industry’s Joyride Is Coming to an End to explore these underlying fundamentals.
In the meantime, keep checking in with Market Realist’s Steel page for more updates.