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What Makes Steel Dynamics Wall Street’s Top Steel Pick?

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Steel Dynamics

According to consensus estimates compiled by Thomson Reuters, Steel Dynamics (STLD) has a mean one-year price target of $38. It represents a 4.4% upside compared to the closing prices on December 28. Of the 16 analysts surveyed by Thomson Reuters, three analysts rated the stock as a “hold.”  Three analysts had a “strong buy” rating on Steel Dynamics, while ten analysts rated the stock as a “buy.” Interestingly, none of the analysts rated Steel Dynamics as a “sell.”

Steel Dynamics received the highest percentage of “buy” ratings among the companies that we’re covering in this series. Notably, Steel Dynamics has been Wall Street’s top pick for 2016. Let’s see what makes analysts love Steel Dynamics in the broader steel space.

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Diversified end market exposure

Steel Dynamics has one of the most diversified end-market exposures compared to other steel companies. For example, AK Steel (AKS) gets more than half of its revenues from the automotive sector, while Nucor (NUE) relies heavily on non-residential construction demand. Diversified end-market exposure reduces a company’s risk profile. Weakness in one customer segment doesn’t have a big impact on earnings.

Growth projects

Steel Dynamics has a healthy balance sheet. While other steelmakers like ArcelorMittal (MT) and U.S. Steel Corporation (X) raised cash by selling shares this year, Steel Dynamics announced a share repurchase program. The company has been using the excess cash on its balance sheet for inorganic and organic growth. Given Steel Dynamics’ healthy balance sheet and the steel industry’s improved outlook, the stock could also witness a credit rating update.

Currently, Nucor (NUE) is the only North American steel company with an “investment grade” credit rating. In the next part, we’ll see how analysts rate the stock.

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