Tariff-Triggered Rout in Steel Stocks Opens Up Unusual Value Gap

(Bloomberg) -- This month’s slump in steel stocks has pushed a key measure of valuations to levels that imply much lower prices for the metal than are currently reflected in futures trading.

Case in point: U.S. Steel Corp., one of the country’s biggest producers. Its shares are trading at 4.4 times forward-looking enterprise value-to-Ebitda after tumbling 25 percent this month, matching the NYSE Arca Steel Index’s decline. That implies a hot-rolled coil steel price of about $650 per ton. Futures prices as of March 22 were around $825 per ton.

Similar discounts are showing in other steel stocks, including AK Steel Holding Corp., Nucor Corp. and Steel Dynamics. Their shares have been ravaged amid growing unpredictability of exemptions to President Donald Trump’s steel tariffs. The NYSE Arca Steel Index had peaked at a six-year high on Feb. 26.

Analysts have mostly kept their optimistic views unchanged. Credit Suisse’s Curt Woodworth said in a research note Thursday that he remains bullish on the U.S. steel sector and that stocks “are still only pricing in $650-675/t HRC,” while prices are probably settling closer to $750 per ton, given a lesser structural deficit. His top picks in the industry are U.S. Steel, Commercial Metals, Steel Dynamics, and Nucor.

In terms of catalyst for the sector, the main event for both aluminum and steel group is their first-quarter earnings reports, which are scheduled to start in late April. Traders are likely to have a strong focus on any potential effect of the import levies and how that will play out for the remainder of this year.

To contact the reporter on this story: Aoyon Ashraf in Toronto at aashraf7@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Richard Richtmyer

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