Free cash flow yield
Along with our look at steel companies’ valuations based on metrics like net earnings and EBITDA (earnings before interest, tax, depreciation, and amortization), we’ll also need to look at cash flows. In this part, we’ll do a comparative analysis of steel companies’ FCF (free cash flow) yields, which refers to free cash flow divided by market capitalization. Remember, a higher FCF yield ratio is seen as a positive sign.
U.S. Steel (X) has the lowest FCF yield in our select group of steel stocks. The stock has an FCF yield of 1.8x based on its consensus 2017 cash flows and of 5.7x based its 2018 expected free cash flows. Notably, U.S. Steel’s cash flows could be suppressed over the next few quarters due to higher maintenance costs.
AK Steel (AKS) has an FCF yield of 4.77x based on its 2017 expected FCF. However, the company’s 2018 FCF yield is the highest in our group of select steel stocks because it generated healthy cash flows in 1H17. Better-than-expected FCF, in fact, was among the key positives in AK Steel’s 1H17 financial performance.
ArcelorMittal (MT) has an FCF yield of 6.42x based on its fiscal 2017 FCF and of 9.36x based on its 2018 consensus. Nucor (NUE) and Steel Dynamics (STLD) have FCF yields of 5.48x and 6.5x, respectively, based on their 2017 consensus FCFs.
Remember, steel companies’ cash flows have improved significantly over the past few years.
In the next and final article of this series, we’ll see how different companies are rewarding shareholders amid strong cash flows.