PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Don't look too hard for steel-stock advocates in this depressed market just yet. Reflecting worries over high levels of steel imports and bloated inventories, steel stocks have been trading at or near their historical lows. Negative factors abound: Declining industrial production, high energy costs, a continued flood of imports encouraged by a strong U.S. dollar, and cutbacks in motor-vehicle output. Steelmakers are struggling from weakened financial positions.
So have their stocks become absolute bargains? Not necessarily. But shares of certain steelmakers that cater to growing niche markets have reached such low valuations that they are worth buying at this point, says Anna Sorbo, steel industry analyst at CIBC World markets. Bargain-hunters should focus, she argues, on companies with "strong management, modern technology, low operating costs, and a high-value-added product mix."
One steel stock that possesses these attributes -- and more -- she say, is IPSCO (IPS
), a Big Board-listed steel minimill producer with steelmaking facilities in North America. "IPSCO is among the most attractive opportunities in the current depressed steel industry," says Sorbo. It's in the right markets and areas of the industry, she notes.
JUICY COMPARISON. And equally compelling: IPSCO is an "attractive acquisition target that offers efficient, state-of-the-art steel plate-making facilities with the lowest plate-making cost structure internatinally," says Sorbo. The company, she says, has a business in tubular-steel products used in oil drilling that should enjoy strong demand fundamentals over the coming years. At its curent price of 7 a share, IPSCO has a market cap of about $328 million -- just 20% of its replacement costs of about $1.6 billion, figures Sorbo.
The recent acquisition of Prudential Steel, an energy tubular-steel producer, by Maverick Tube at $486 million, "illustrates the valuation appeal of IPSCO," says Sorbo. Based on that deal, IPSCO's current market value doesn't assign any value to its steelmaking and plate-processing segment, with a capacity of producing 3.5 million tons annually. "In addition, IPSCO's tubular business, very similar in size and nature to that of Prudential Steel's, is valued at a discount of 32% to what Prudential was sold for," she says.
Sorbo thinks Nucor (NUE
), a leading U.S. minimill producer, is one of the potential buyers of IPSCO. She notes that Nucor has a strong balance sheet and has been trying to break into the plate-making market using technology similar to IPSCO's. It has recently built a plate mill in North Carolina and is in the process of starting it up. But Nucor's mill has been scaled down, notes the analyst, compared to IPSCO's plates mills in Montpelier, Vt., and Mobile County, Ala.
WORTH DOUBLE? "If Nucor decides to become a sizable player in the North American plate market, buying IPSCO could be the most attractive option," says Sorbo. She estimates that IPSCO is worth at least twice its current stock price in a buyout. She notes that Nucor has publicly commented that acquisitions will represent an important part of the company's future growth strategy.
The near-term catalyst that should push up IPSCO's stock, says Sorbo, is a successful startup of its Mobile County plate mill. About the only positives in the industry are the strong demand for certain types of steel for the oil industry and infrastructure building. In the oil industry, tubular-steel demand has been strong due to the high oil prices. Prices of such tubular-steel products have been stable, at about $1,036 per ton, notes Sorbo. And the price of steel plates used in infrastructure projects, including storage tanks, ships, and rail cars, has also been stable, the analyst adds.
Sorbo expects IPSCO will earn $1 a share in 2000 and $1.84 in 2001, helped in part by an expected modest recovery in steel prices. Takeover or not, not many steelmakers have IPSCO's potential for a nice recovery.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
