Novamerican: Momentum Play for the Value Set

Every time it seems as if the rally in steelmakers is about to fade, another headline rolls out of Asia to send the group up another notch.

The latest crack in the stocks came in early October, when leading producer U.S. Steel (X Quote) plunged from $42 to $32 in a week. The recovery began in late October, when traders turned around U.S. Steel's seemingly broken chart and pushed it up nonstop for a month to an all-time high in the low $50s. The most recent jump came late last week on a report that a steel shortage would curtail Japanese auto production.

While many steel stocks are now very richly valued, one that seems relatively inexpensive is Canada-based Novamerican Steel (TONS Quote). Shares of the flat-rolled and stainless-steel maker are up 80% in the past six months, but as a measure of how depressed it was prior to this run, it still goes for a puny price-to-earnings multiple of 6 and a price-to-sales multiple of 0.49, both of which are half the industry average.

In its most recent earnings report, on Sept. 28, Novamerican reported earnings-per-share growth of $2.17 in the third quarter, up 913% from the prior year. Over nine months, the company said it earned $4.97 per share -- up from 58 cents the prior year -- while revenue rose 50%.

If you assume earnings for the current quarter will be in line with the last, the fiscal year P/E will be 5. Compare that with counterparts such as Gibraltar(ROCK Quote), with a P/E of 14, or Worthington (WOR Quote) at 11 and AK Steel (AKS Quote) at 10. And these four competitors' earnings are expected to stagnate next year, while Novamerican management said in a recent press release that it expects "contract pricing in 2005 to be significantly higher than was realized in 2004." (There are no sell-side estimates for Novamerican.)