In the face of challenging macroeconomic conditions, steel stocks have soared with core catalysts stemming from the increased demand from the energy, appliances, and automotive end markets. Furthermore, the rising global population leads to higher demand for products, infrastructure, and, consequently, steel.
Considering the favorable industry backdrop, investing in quality steel stocks Tenaris S.A. (TS), Ternium S.A. (TX), and Worthington Industries, Inc. (WOR) this week could help strengthen your portfolio in the long run. Before delving into the fundamentals of these stocks, let’s look at the steel sector.
Steel is a crucial material for building and industrial production, so demand for the material can serve as a leading indicator of economic activity. Steel demand is expected to increase with China reopening and lower interest rates on the horizon, leading to higher prices.
The World Steel Association released its Short-Range Outlook, predicting a 2.3% rebound in steel demand to 1.82 billion metric tons in 2023. It also expects a 1.7% growth in 2024, reaching 1.85 billion mt.
Moreover, analysts expect China’s steel exports to hit a seven-year high this year. Steel exports in the first five months of this year were up 41% year-over-year, with strong demand from Southeast Asia, the Middle East, and Africa helping keep a lid on stocks and allowing mills to continue operations.
Traders have recently seen improved overseas buying appetite. Analysts expect that the exports could easily surpass the 67.32 million metric tons shipped last year, with a volume of up to 77 million metric tons.
Furthermore, the global steel market is projected to reach 2.3 billion metric tons by 2030, growing at a CAGR of 3%. Given the solid footing of the steel industry, let’s discuss the above-mentioned stocks in detail:
Tenaris S.A. (TS)
TS provides seamless and welded steel tubular products and related services to the energy industry. The company offers steel casings, tubing products, mechanical and structural pipes, cold-drawn pipes, sucker rods, coiled tubing, industrial equipment, heat exchangers, and power generation.
On July 3, the company’s subsidiaries Confab Industrial S.A., Ternium Investments, and Ternium Argentina completed the previously announced acquisition of 68.7 million ordinary shares of Usinas Siderúrgicas de Minas Gerais S.A. (Usiminas) (USNZY) from Nippon Steel Corporation, Mitsubishi and MetalOne for BRL 10 per common share.
Analysts expect this acquisition would allow the company to expand its business and strengthen its position in the steel industry.
In terms of trailing-12-month ROTC and ROTA, TS’ 16.59% and 17.06% are 47.9% and 93.5% higher than the industry averages of 11.21% and 8.81%, respectively. Likewise, its trailing-12-month net income margin of 23.49% is 52.9% higher than the industry average of 15.36%.
During the fiscal 2023 first quarter (ended March 31, 2023), TS’ net sales increased 74.9% year-over-year to $4.14 billion. Its operating income improved 179.1% from the year-ago value to $1.35 billion, while its net income rose 124.4% from the prior-year quarter to $1.13 billion.
The company’s EPS stood at $0.96, up 123.2% year-over-year. Also, its EBITDA came in at $1.48 billion, representing a 135.4% improvement year-over-year.
The consensus EPS estimate of $1.61 for the fiscal second quarter (ended June 30, 2023) represents a 49.7% improvement year-over-year. The consensus revenue estimate of $3.78 billion for the to-be-reported quarter indicates a 34.9% increase from the same period last year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
TS’ shares have gained 21.2% over the past year to close the last trading session at $30.17.
TS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Growth, Value, and Quality. Among the 33 stocks in the A-rated Steel industry, it is ranked #5. Click here to see the other ratings of TS for Stability and Sentiment.
Ternium S.A. (TX)
TX is a steel producer which produces finished and semi-finished steel products and iron ore. It operates through two segments, Steel and Mining. The company serves various companies and small businesses in the construction, automotive, home appliances, packaging, transport, and energy industries.
On June 20, TX announced that its new steel slab mill will be located at its existing downstream facility in Pesquería, Nuevo León, Mexico. The construction of the new facility is expected to begin in December 2023, with operations anticipated to start during the first half of 2026. Also, the facility will be equipped with the latest technologies to enhance sustainability.
Máximo Vedoya, TX's CEO, commented, “This decision is a significant milestone for our company as we continue to integrate our downstream manufacturing capabilities to serve all our customers in Mexico while solidifying our position as a leading player in the USMCA region.”
TX’s steel shipments increased 3.9% year-over-year to 3.06 million tons in the fiscal first quarter ended March 31, 2023, while its net sales amounted to $3.62 billion. During the same period, the company reported an operating income, adjusted EBITDA, and net income of $357 million, $508 million, and $480 million, respectively. Also, its EPS stood at $1.91.
In addition, its total current assets of $9.09 billion increased by 2.9% compared to $8.84 billion as of December 31, 2022.
Analysts expect TX's EPS to increase 100.7% year-over-year to $1.57 in the third quarter (ending September 2023), while its revenue is expected to amount to $3.83 billion in the same period.
TX’s trailing-12-month levered FCF margin of 11.43% is 221.8% higher than the 3.55% industry average. Also, its trailing-12-month ROTC and ROTA of 8.67% and 7.63% are 41.7% and 62.9% higher than the industry averages of 6.12% and 4.68%, respectively.
The stock has gained 46.4% over the past nine months to close the last trading session at $41.
TX’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
It also has a B grade for Value, Momentum, Stability, and Quality. Within the same A-rated industry, it is ranked #6. To see additional POWR Ratings of TX for Growth and Sentiment, click here.
Worthington Industries, Inc. (WOR)
WOR is an industrial manufacturing company focused on value-added steel processing, manufactured consumer, building, and sustainable mobility products. It operates through Steel Processing; Consumer Products; Building Products; and Sustainable Energy Solutions segments.
On June 28, the company declared a quarterly dividend of $0.32 per share, reflecting an increase of 3% from the prior quarter. This dividend is payable to its shareholders on September 29, 2023. Since its inception, WOR has paid quarterly dividends, marking the 13th consecutive year it has increased its dividend.
WOR’s four-year average yield is 2.23%, while its annual dividend of $1.28 translates to a 1.88% yield on current prices. Its dividend payouts have increased at CAGRs of 8.9% and 8.1% over the past three and five years, respectively.
In terms of trailing-12-month, WOR’s levered FCF margin of 6.97% is 96.3% higher than the 3.55% industry average. Likewise, its trailing-12-month asset turnover ratio of 1.35x compares to the industry average of 0.74x.
In the fourth quarter that ended on May 31, 2023, WOR’s net sales amounted to $1.23 billion, while its gross margin increased 45.7% year-over-year to $244.37 million. Non-GAAP operating income improved 110.5% from the year-ago value to $132.81 million.
Also, its non-GAAP net earnings came in at $136.56 million and $2.74 per share, up 74.2% and 73.4% from the prior-year quarter. In addition, its adjusted EBITDA increased 51.8% year-over-year to $211.40 million.
Street expects WOR’s EPS to be $2.01, indicating a 24.8% year-over-year growth in the fiscal first quarter (ending August 31, 2023), while its revenue is expected to amount to $1.23 billion in the same period. Further, EPS and revenue are projected to reach $5.72 and $4.38 billion in fiscal year 2024. Moreover, the company topped the revenue estimates in three of the trailing four quarters.
Over the past nine months, the stock has gained 60.8% to close the last trading session at $67.93.
It’s no surprise that WOR has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Momentum, Sentiment, and Quality. Out of 33 stocks in the same industry, it is ranked #7.
In addition to the POWR Ratings we’ve stated above, we also have WOR’s ratings for Growth, Value, and Stability. Get all WOR ratings here.
What To Do Next?
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TS shares were trading at $30.07 per share on Monday afternoon, down $0.10 (-0.33%). Year-to-date, TS has declined -12.25%, versus a 15.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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