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Why Steelmakers are Surging: X, AKS, STLD

Stocks in this article: XAKSSTLDRS

NEW YORK (TheStreet) -- Steelmakers U.S. Steel (X), AK Steel (AKS) and Steel Dynamics (STLD) are gaining on Goldman Sachs' optimistic analysis of the sector even as Reliance Steel (RS) remains flat.

Goldman analysts Sal Tharani and Chelsea Bolton, in an investor report published Monday, upgraded the steel sector to "neutral" from "cautious" citing the likelihood of a "sustainable recovery over the coming years".

"Although volatility associated with this deeply cyclical sector will remain a norm, we believe that investors should start to look beyond near-term headwinds. The supply-demand fundamentals for steel are starting to look more appealing," wrote the Goldman analysts.

AK Steel Holding Corporation

AK Steel Holding Corporation is leading the gains, up 11.1% to $5.11 as of 12:12 p.m. EDT. Goldman Sachs upgraded it to "buy" from "sell", on the belief the company will "see notable margin expansion in 2015 and beyond as it executes its new iron ore strategy".

TheStreet Ratings team rates AK Steel Holding Corp as a Sell with a ratings score of D. The team has this to say about their recommendation:

"We rate AK Steel Holding Corp (AKS) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow, poor profit margins and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has significantly decreased to -$119.20 million or 53.21% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The gross profit margin for AK STEEL HOLDING CORP is currently extremely low, coming in at 10.34%. Regardless of AKS's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, AKS's net profit margin of -2.38% significantly underperformed when compared to the industry average.
  • AKS has underperformed the S&P 500 Index, declining 12.7% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
  • AKS, with its decline in revenue, underperformed when compared the industry average of 3.2%. Since the same quarter one year prior, revenues slightly dropped by 9%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • AK STEEL HOLDING CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, AK STEEL HOLDING CORP reported poor results of -$9.10 a share vs. -$1.41 a share in the prior year. This year, the market expects an improvement in earnings (-64 cents vs. -$9.10).

U.S. Steel

U.S. Steel Corporation has gained 4.6% to $26.97 after Goldman Sachs upgraded it to buy from sell.

"We are getting constructive on flat steel fundamentals and also see headwind from its cost-cutting measures," it explained.

TheStreet Ratings team rates United States Steel Corp as a Sell with a ratings score of D+. The team has this to say about their recommendation:

"We rate United States Steel Corp (X) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, generally high debt management risk, disappointing return on equity and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • United States Steel Corp has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Earnings per share have declined over the last year. We anticipate that this should continue in the coming year. During the past fiscal year, United States Steel Corp reported poor results of -97 cents a share vs. -59 cents a share in the prior year. For the next year, the market is expecting a contraction of 31.4% in earnings (-$1.28 vs. -97 cents).
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 4170.4% when compared to the same quarter one year ago, falling from $44 million to -$1,791 million.
  • The debt-to-equity ratio is very high at 2.22 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, X maintains a poor quick ratio of 0.81, which illustrates the inability to avoid short-term cash problems.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Metals & Mining industry and the overall market, UNITED STATES STEEL CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to $37 million or 61.85% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

Steel Dynamics

Steel Dynamics is 2.6% higher to $18.92 after Goldman Sachs upgraded it to "buy" from "neutral", due to the belief benefits of the non-residential construction market recovery are not priced into the stock's value.

TheStreet Ratings team rates Steel Dynamics INC as a Buy with a ratings score of B. The team has this to say about their recommendation:

"We rate Steel Dynamics INC (STLD) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income, attractive valuation levels, good cash flow from operations and notable return on equity. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • STLD's revenue growth has slightly outpaced the industry average of 3.2%. Since the same quarter one year prior, revenues rose by 12.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Metals & Mining industry. The net income increased by 347.9% when compared to the same quarter one year prior, rising from $12.83 million to $57.49 million.
  • Net operating cash flow has significantly increased by 56.14% to $183.27 million when compared to the same quarter last year. In addition, Steel Dynamics INC has also vastly surpassed the industry average cash flow growth rate of -28.16%.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Metals & Mining industry and the overall market on the basis of return on equity, Steel Dynamics INC has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.

Reliance Steel & Aluminum

Goldman Sachs downgraded Reliance Steel & Aluminum (RS) to "neutral" from "buy" on the view it is fully valued. Shares remained unchanged at $74.40.

TheStreet Ratings team rates Reliance Steel & Aluminum CO as a Buy with a ratings score of B. The team has this to say about their recommendation:

"We rate Reliance Steel & Aluminum CO (RS) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, attractive valuation levels and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 3.2%. Since the same quarter one year prior, revenues rose by 18.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, RS's share price has jumped by 34.87%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, RS should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • Despite currently having a low debt-to-equity ratio of 0.56, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that RS's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.68 is high and demonstrates strong liquidity.
  • Reliance Steel & Aluminum CO's earnings per share declined by 6.2% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, Reliance Steel & Aluminum CO increased its bottom line by earning $5.34 a share vs. $4.58 a share in the prior year. For the next year, the market is expecting a contraction of 18.2% in earnings ($4.37 a share vs. $5.34 a share).

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