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Value Investors Find Bargains in U.S. Steel and Gerdau

Stocks in this article: X GGB AKS MT SLX

NEW YORK (TheStreet) -- When the economic environment turns hostile, steel companies such as U.S. Steel (X - Get Report), Gerdau SA (GGB), AK Steel (AKS) and ArcelorMittal (MT - Get Report) are always early casualties. But that also means  these companies can become very attractive to value investors when bullish signs pop up again. The recent strong export reports for both the United States and China should have investors looking for bargains in the steel sector.

As detailed in a recent piece, China increased both exports and imports in November. Exports increased by 12.7%, according to the General Administration of Customs, topping estimates from analysts. The U.S. Department of Commerce reported that American exports were the highest ever recorded for October. Imports rose for the United States in October, too.

Both the world's largest and second largest economies are importing and exporting more -- unmistakable signs that conditions are improving in many sectors.

That is certainly the case in the steel industry. For the first three quarters of 2013, world steel production increased by 2.7% from 2012, which was a record year. Despite the improving outlook, the steel sector remains fragmented and undervalued. Utilization rates have declined to around 80%.

These conditions create opportunities for long-term value investors.

ArcelorMittal, the world's largest steel company, is trading at a price-to-book ratio of 0.63 and a price-to-sales ratio of 0.39. That means that ArcelorMittal's assets are valued at a more than a one-third discount to the stock price. Sales are going for almost a two-thirds discount on the same basis.

It is much the same story with Gerdau SA, AK Steel and U.S. Steel.

From its headquarters in Brazil, Gerdau SA has become the leading long steel maker in the world. Gerdau SA has a price-to-sales ratio of 0.83. The forward price-to-earnings ratio is under 11. At around eight times forward earnings, it is quite attractive to value hunters.

Although U.S. Steel's glory days are long gone, value investors should like the price-to-sales ratio of just 0.22. The company was downgraded twice in October. But the share price has increased more than 34% for the last quarter of trading. The analyst consensus is that earnings per share will increase by more than 184% over the next year.  Investors seem to be finding the analyst predictions more significant than the downgrades are.

Rival AK Steel operates seven steelmaking facilities in the United States. The largest market for steel products in the U.S. is the automotive industry, which has been improving. As the auto market represents about one-third of the business for AK Steel, the bullish outlook for American-built cars and trucks is certainly a positive. AK Steel also just raised prices for stainless steel, another favorable development.

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