In a year when the Dow Jones Industrial Average (up 8.8%) and the S&P 500 (up 13%) are poised to end at or near all-time highs, the Market Vectors Steel ETF (SLX) has lost 29%. Take a look at the chart.
Investors shouldn't have been surprised, however. This past year's weak performance is not new. The fund has three-year and five-year declines of 28% and 42%, respectively, underperforming both the Dow and S&P 500 during those periods.
So will things change in 2015? Yes, but for only some steel companies.
One of the first companies investors should keep an eye on for 2015 is Steel Dynamics (STLD) . The company has been a relative outperformer this year, even though the stock has gained (only) 0.6%. Nonetheless, shares are up more than 10% over the past six months.
Investors are getting a bit more excited about the company's future. Part of the reason is that Steel Dynamics is making money, unlike rivals such as ArcelorMittal (MT) (down 37%) and Vale S.A. (VALE) (down 46%) that operate at losses. Its stock also pays a dividend yield of 2.34%, one of the best in the industry.
What's more, Steel Dynamics recently projected fourth-quarter adjusted earnings to be in the range of 38 cents to 42 cents per share. The midpoint of that range suggest year-over-year growth of 67%. This is helped by the company's acquisition of Severstal Columbus, completed in September.
And although Steel Dynamics sees fourth-quarter declining shipments as risks to its business, the company doesn't expect these to hurt profitability. It says it expects to report profits from its steel operations that match its third quarter. Profits from its fabrication business, where it cuts, bends and structures metals for various products, are expected to be strong -- helped by higher product pricing.
The stock is trading at around $19, and the highest 12-month price target from a Wall Street analyst is $31, which suggests the stock can gain 63%. It's difficult to trust the steel industry enough to expect such a strong gain. To the extent that Steel Dynamics can continue to grow revenue from the automotive and manufacturing industries while using its Severstal purchase to create value, $25 per share seems attainable in the next 12 months.
For similar reasons, investors should keep an eye on Nucor Corporation (NUE) , the largest steel maker in the U.S. Although its shares are down more than 7% in 2014, Nucor has begun to focus on efficiency -- ways to lower costs and improve profits. This is something that's hurt rivals such as AK Steel (AKS) (down 28%) and Gerdau SA (GGB) (down 54%). Take a look at the chart.
In September, Nucor picked off Gallatin Steel, which specializes in a variety of steel products from low- to high-carbon grades and various products to make flat-rolled steel. Gallatin, which has an annual capacity of almost 2 million tons, was owned in a 50-50 joint-venture between ArcelorMittal and Gerdau. The purchase by Nucor was completed in October.
What investors should remember is that the overall cost of the deal is actually less than the $770 million official price tag. According to Nucor representatives, the total cost of the deal is projected to be only $630 million when adjusted for anticipated tax benefits.
So from that standpoint, these savings, along with possible synergies over the next couple of years, should add incremental value to the company. Not to mention, the deal gives Nucor much-needed exposure in the Midwest to better compete with rivals. That, coupled with a boost to its annual flat-rolled capacity, justifies the deal.
Nucor shares are changing hands at around $49. The highest 12-month price target from a Wall Street analyst is $66, which suggests the stock can gain 34%. Plus, based on 2015 earnings estimates of $3.40 per share, according to CNN Money, Nucor is projected to grow earnings by more than 50% next year, making it -- perhaps -- the steel stock to own next year. And it pays a yield of 3.03%.