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Do Steel Companies’ Valuations Look Tempting?

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Sep. 13 2018, Updated 6:30 a.m. ET

Steel companies’ valuation

This month we’ve seen share buyback announcements by both Nucor (NUE) and Steel Dynamics (STLD). Share buybacks are a tool for management to return cash to shareholders. Generally, companies pursue share buybacks when they have surplus cash or they find their stocks undervalued. Steel companies’ cash flows have certainly improved amid higher steel prices. But do their valuations look tempting?

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Forward EV-to-EBITDA

Forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) is the preferred valuation metric for steel companies. U.S. Steel (X) is trading at an EV-to-EBITDA of 3.46x its 2018 consensus EBITDA and 3.29x its 2019 consensus EBITDA. The stock’s valuation multiple is the lowest among the stocks that we’re covering in this series. U.S. Steel’s valuation is also below its historical trading multiples.

ArcelorMittal (MT) and AK Steel (AKS) are trading at EV-to-EBITDA ratios of 4.15x and 5.27x, respectively, their expected EBITDA for 2019. Nucor (NUE) is trading at an EV-to-EBITDA of 5.57x its 2018 expected EBITDA and 6.15x its 2019 expected EBITDA.

Steel Dynamics

Steel Dynamics (STLD) is the most expensive steel stock among the steel companies that we’re covering in this series. The stock carries a 2019 EV-to-EBITDA of 6.29x. Notably, Steel Dynamics’ valuation multiples are now at a premium to Nucor’s. Historically, Nucor has had the highest valuation multiples as compared to other steel companies that we’re discussing in this series.

Steel companies’ valuations appear attractive. However, we also need to look at the earnings estimates to get a better sense of these multiples. In the next article, we’ll see what analysts are projecting for steel companies’ 2019 earnings.

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