Steel stocks have seen a selling spree in 2018, which we discussed in the previous part. From a fundamental perspective, steel companies’ earnings have been strong. Since there has been a disconnect between steel companies’ earnings and price action, the valuation multiples have started to look attractive.
There are several metrics that can be used for the valuation. For industrials and metal companies, the EV-to-EBITDA multiple is generally preferred. Looking at different steel stocks, U.S. Steel Corporation (X) is trading at an EV-to-EBITDA multiple of 2.87x based on its 2019 consensus EBITDA. The stock’s forward valuation multiples are the lowest in our coverage of steel stocks. ArcelorMittal (MT) and AK Steel (AKS) have 2019 EV-to-EBITDA multiples of 3.6x and 5.17x, respectively. Nucor’s (NUE) 2019 EV-to-EBITDA multiple of 5.95x is the highest in our coverage of steel stocks.
Steel companies’ valuation, especially for U.S. Steel Corporation and ArcelorMittal, looks compelling. Since investors have been frugal in valuing steel stocks, steel companies have looked at buybacks to shore up their stock prices and utilize their excess cash flows. Steel companies including Cleveland-Cliffs (CLF) and U.S. Steel Corporation have announced buybacks in 2018.
Are steel stocks cheap for a reason or is there an opportunity to capitalize on the disconnect in earnings and the valuation?