With the policies of Donald Trump poised to help steel companies over the medium-term, the recent decline of steel stocks has created a great buying opportunity for investors.
In the last month, AK Steel Holding Corporation (NYSE:AKS) and United States Steel Corporation (NYSE:X) have tumbled about 19% and 36%, respectively, while Nucor Corporation (NYSE:NUE) has risen around 1.2%.
None of their valuations is too expensive, as AKS has a forward price-to-earnings ratio of 7.5, NUE has a forward P/E of 13.5 and X’s forward P/E is around 9.1. Investors should buy these steel stocks ahead of upcoming actions by the administration of Donald Trump.
On April 20, Donald Trump ordered the government to probe whether steel imports are hurting U.S. national security. It is very likely that political considerations will ultimately lead Trump to place additional tariffs on Chinese steel, significantly boosting the profits of steel companies and leading to a rally in steel stocks.
During the 2016 presidential campaign, Donald Trump promised that he would slap high tariffs on China in order to boost U.S. industrials. But earlier in April, Trump declined to label China a currency manipulator. In order to avoid blatantly violating his campaign pledge, Donald Trump will have to slap some sort of tariffs on China. And multiple previous U.S. administrations have placed tariffs on Chinese steel, suggesting that it is a legitimate target for tariffs that will not trigger a ruinous trade war with Beijing.
Additionally, Pennsylvania and Ohio have historically produced a significant amount of steel, and there are still some steel plants in both states. Donald Trump won narrow victories in both states, at least partly because he received the votes of many blue collar workers who had supported Democrats in the past. By boosting the profits of steelmakers in both states, the president may be able to create more relatively high paying manufacturing jobs in both places and increase the chances that he will be reelected in 2020.
What Donald Trump Could Do for Steel Stocks
Evidence suggests that tariffs do greatly increase steel prices. Last year, for example, U.S. benchmark steel prices jumped more than 60% after the Obama Administration placed duties on steelmakers from China and several other countries. Similarly, the steel tariffs imposed by President George W. Bush “ gave U.S. steel producers massive pricing power,” a study reported by The Wall Street Journal found.
But, as the study points out, U.S. manufacturers were hurt by the steel price increases, the negative impact of the price hikes won’t be as visible as the positive impact of the tariffs on the steel sector. Moreover, steelmakers and many other American manufacturers will probably be significantly helped by the Trump Administration’s upcoming infrastructure initiative.
On April 5, Donald Trump told The New York Times that he was working on “a very big infrastructure plan” that is “going to come soon” and could be incorporated into health care or tax cut legislation. Under Trump’s plan, the federal government would spend $1 trillion dollars on the initiative and may look to incentivize additional private entities to spend additional funds on infrastructure, the president indicated.
Of course, steel companies and other industrials will greatly benefit from various projects likely to be included in any infrastructure initiative, such as the repair of bridges and the laying of new train tracks. Additionally, by partnering with private entities and stimulating private investment in infrastructure through tax credits, as Donald Trump seems to be considering, the federal government may be able to make the process more efficient and avoid some of the delays that have characterized past infrastructure initiatives.
Bottom Line on Steel Stocks
Separate negative issues marred the results of X and NUE last week, but Trump’s policies should more than compensate for the problems identified by the companies.
U.S. Steel reported a loss of $1.03 versus the consensus estimate of a 32 cent per share profit. The company explained that it was taking steps to improve and expand its assets so that it can fully exploit the higher price of steel triggered by restrictions on cheap Chinese exports. However, JPMorgan kept a $46 price target and an Overweight rating on the shares based on his belief that it, along with other domestic steelmakers, will in fact benefit from the Trump Administration’s efforts to limit illegal steel imports.
After X stock dropped about 26% in the wake of its earnings, the shares would have to more than double to reach the firm’s price target. The shares now trade at a rather undemanding valuation, especially given the positive policies that the Trump Administration will pursue.
AKS reported stronger than expected results and noted that its adjusted EBITDA surged 76% year-over-year. But the steelmaker also reported that its shipments to automakers dropped 5% last quarter versus the same period a year earlier and it said that its adjusted EBITDA margin this quarter would drop slightly compared with the first quarter. It explained that its shipments to auto companies are poised to decline slightly this quarter.
But Trump’s tax cuts and infrastructure initiative are likely to boost household incomes and consequently auto sales, returning the company’s shipments to auto companies to growth.
Donald Trump looks poised to boost steel makers’ profits by imposing tariffs on steel imports and implementing a massive infrastructure plan. After American steel stocks AKS, X, and NUE dropped over the last month, their valuations are quite attractive and they would make great additions to investors’ portfolios.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
