Steel stocks were once king in America. Over recent years, though, the economy of the United States has been driven by the consumption and services sector. However, it seems that the next decade will witness a revival of the manufacturing and infrastructure sector.
This is critical as the economy needs a finer balance between production and consumption.
With the $1 trillion infrastructure bill likely to pass the final hurdle, infrastructure-related stocks have been surging. Steel stocks have already witnessed a strong rally in the last 12-months and more upside seems likely with multi-year positive tailwinds on the cards.
My point is backed by the prediction from UBS (NYSE:UBS) that steel prices will continue to surge in 2022. This would imply higher revenue, EBITDA margin and cash flows for steel producers. It’s also worth noting that steel companies are also likely to benefit from the boom in the electric vehicle and renewable energy industries.
Let’s therefore talk about four steel stocks that seem to be best positioned to benefit from the impending historic infrastructure boom.
- United States Steel (NYSE:X)
- Steel Dynamics (NASDAQ:STLD)
- Nucor Corporation (NYSE:NUE)
- Cleveland-Cliffs (NYSE:CLF)
Steel Stocks To Buy: United States Steel (X)
X stock has been trending higher with an upside of 66% in the last six months. Even if there are intermediate corrections, the stock seems positioned to remain in an uptrend.
United States Steel is focused in North America and Europe. The key segments of the company include flat-rolled, mini-mill and U.S. Steel Europe segment.
It’s worth noting that the company’s business has witnessed a strong turnaround. For Q2 2021, United States Steel reported an adjusted EBITDA of $1,286 million. For the prior year comparable period, the company had reported an adjusted EBITDA loss of $264 million.
United States Steel has also acquired Big River Steel in January 2021. In Q2 2021, Big River reported a healthy EBITDA margin of 36%.
The acquisition is likely to boost the company-level margin. With this acquisition, the company also intends to gain a leadership position in non-grain-oriented electrical steel.
Another important point to note is that the company closed Q2 2021 with a total liquidity buffer of $4.2 billion. The financial flexibility is likely to increase further with improvement in margins. This will allow United States Steel to pursue organic and acquisition-driven growth.
Steel Dynamics (STLD)
As a steel producer and metal recycler in the United States, STLD stock looks like another interesting pick. With a focus on rebuilding infrastructure translating into demand for steel, the stock has witnessed an upside of 70% in the last six months.
However, the stock still looks very attractive at a forward price-to-earnings ratio of 5.1. Additionally, the stock offers a dividend yield of 1.47%. It seems likely that dividends will increase in the coming years on the back of EBITDA margin expansion and higher cash flows.
Specific to the company’s business, focus on value-added steel is a key differentiating factor. The company claims to be a market leader in the production of premium and value-added steel products. The key advantage here is in terms of EBITDA margin expansion.
For Q2 2021, the company reported sales of $4.5 billion and an adjusted EBITDA of $1.0 billion. With steel prices trending higher coupled with a renewed focus on high-grade products, it’s likely that EBITDA margin will expand further.
Another point to note is that the company reported net leverage of 1.3. With a healthy liquidity buffer, the company has an investment-grade balance sheet. This provides ample headroom for organic and transactional growth.
Steel Stocks To Buy: Nucor Corporation (NUE)
Like most steel stocks, NUE stock has been in an uptrend. With a market leadership position, Nucor is worth considering with industry tailwinds. Currently, the company accounts for 26% of America’s steel production.
Nucor is also well-diversified from a product perspective. The primary growth drivers include steel products, sheet steel, bars, raw materials and structural steel. For Q2 2021, the company reported 105% growth in revenue to $8.8 billion.
Further, for the first half of 2021, Nucor reported an operating cash flow of $1.8 billion. With accelerating sales and margin improvement, NUE stock seems positioned for value creation.
The company also has a strong balance sheet with a cash buffer of $2.7 billion. Additionally, the company has an undrawn credit facility of $1.5 billion.
The financial perspective is important with the company having $2.0 billion in capital expenditure commitment for 2021. Further, the company has invested $2.0 billion in new projects since 2019.
These projects are likely to have an incremental annual EBITDA impact of $600 million. Further, with investment in value-added processing, the company is positioned for EBITDA margin expansion in the next few years.
Besides the stock upside potential, NUE stock also offers an attractive dividend yield of 1.35%. Considering the free cash flow potential, there is clear dividend growth visibility for the next few years.
Another interesting name to consider among steel stocks is Cleveland-Cliffs. The company is the largest flat-rolled steel producer in North America after the acquisition of AK Steel and ArcelorMittal USA.
It’s worth noting that 29% of the end market for the company’s steel is from the automobile sector. The company’s steel is already being used in electric vehicle models.
Additionally, 25% of steel sales is towards the end market of manufacturing and infrastructure. This is another potential high-growth segment for the company.
The company’s steel also finds application in the modern electricity grid and sustainable energy. Therefore, with a focus on infrastructure and clean energy, the company is well-positioned for long-term growth.
For Q2 2021, the company reported revenue of $5.0 billion and adjusted EBITDA of $1.4 billion. Further, the company has guided for EBITDA of $5.5 billion for 2021. The company is therefore positioned for robust cash flows. One of the objectives is to deleverage. As credit metrics improve, the stock is positioned for re-rating.
Another factor to like about Cleveland-Cliffs is the fact that the company is vertically integrated in steel-making raw materials. This is likely to help in boosting overall margins.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.