Street Calls of the Week
Investing.com -- The steel sector faces challenges with weaker-than-expected prices in the third quarter, but Jefferies analysts see positive signs ahead as US imports begin to decline. According to their recent report, Nucor Corp (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) offer the best risk/reward profiles in the current market environment.
Jefferies notes that while US steel prices, including scrap steel, underperformed expectations in Q3, recent conversations with industry participants suggest import levels should continue to fall. This development could provide much-needed support for domestic steel producers in the coming months.
The firm has updated its models with actual Q3 steel prices and revised forecasts for certain steel products. Their analysis points to two clear leaders in the sector:
1. Nucor Corp (NYSE:NUE) - Jefferies assigns a base case price target of $170, representing a 25% upside potential. The investment thesis highlights steel prices remaining well-supported over the next 3-5 years, with Nucor’s product diversification leading to sustainable earnings.
The company’s strong balance sheet supports further dividend increases and share buybacks. In an upside scenario, Nucor could reach $200 (48% upside) if steel prices average 15% higher than forecasted.
Key sustainability initiatives include reducing consumption of fossil fuel-generated electricity and achieving net zero greenhouse gas targets.
Nucor Corporation announced it expects third-quarter earnings to be lower than the second quarter, ranging between $2.05 and $2.15 per share. Following the guidance, Wells Fargo lowered its price target on the company, while Freedom Broker issued an upgrade to Buy.
2. Steel Dynamics (NASDAQ:STLD) - With a base case price target of $165 (17% upside), Jefferies views Steel Dynamics as somewhat inexpensive relative to peers. The company’s product diversification, including aluminum, contributes to sustainable earnings potential.
Like Nucor, Steel Dynamics boasts a strong balance sheet supporting dividend increases and share repurchases. In an optimistic scenario, the stock could reach $215 (52% upside) with higher-than-expected steel prices. The company aims to reduce Scope 1 & 2 GHG emissions by 50% by 2030 and become carbon neutral by 2050.
In a recent development, Steel Dynamics provided third-quarter earnings guidance of $2.60 to $2.64 per share, an expected improvement over the prior quarter. The company also announced a definitive agreement to acquire the remaining 55% equity interest in its largest flat roll steel customer, New Process Steel.
Both companies face similar downside risks, with Jefferies citing a potential prolonged economic slowdown and weaker steel demand as primary concerns. In such scenarios, both stocks could fall to around $100, representing declines of 26% for Nucor and 29% for Steel Dynamics.
Catalysts for both companies include construction-related demand trends, headline steel pricing data, and potential trade measures that could benefit domestic producers.
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