Free cash flows
Previously, we looked at steel companies’ valuations based on net income. However, we should remember that net income could be prone to accounting gimmicks. Furthermore, different accounting policies make the metric somewhat incomparable. For this reason, markets also follow cash flow metrics. In this article, we’ll look at different steel companies’ forward FCF (free cash flow) yield. Free cash flows are operating cash flows minus capital expenditure.
Based on 2018 free cash flow estimates, AK Steel (AKS) has the highest FCF yield in our select group of steel stocks (XME). U.S. Steel (X) has the lowest FCF yield of 2.1. Nucor (NUE) and Steel Dynamics (STLD) have an FCF yield of 6.8 and 8.5, respectively, based on their 2018 free cash flow estimates. A higher FCF yield is a positive sign.
In U.S. Steel’s case, the company expects to incur higher capital expenditure over the next couple of years that would negatively impact its free cash flow profile. Under its asset revitalization plan, U.S. Steel expects to spend almost $1.2 billion over the next few years to modernize its facilities. These investments would be spread across its various business operations. However, the bulk of these investments is expected in 2018.
However, its worth noting that these valuation multiples are based on analysts’ estimates. Now, steel companies’ earnings are sensitive to movement in spot steel prices. As things stand today, there’s no reason to expect a sharp fall in steel prices next year. Having said that, surprises can never be ruled out in the cyclical steel industry.
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