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British Steel: Rich,Debt Free, And Buying American


Inside Wall Street

BRITISH STEEL: RICH,DEBT-FREE, AND BUYING AMERICAN

As investors look ahead to a revival of consumer demand and capital spending, they have bid up the shares of cyclical stocks--chemical, auto, and steel companies. Is it too late to join the festivities? Not if you're considering a deceptively unglamorous-looking multinational steel producer, British Steel.

It's the largest steel company in Britain, where it was under the wing of the government until its privatization in December, 1988. In 1990, its Big Board-traded American Depositary Receipts (ADRs) treaded water as the British economy slumbered. Recently, they have accelerated along with the market surge--without exactly burning rubber (chart). Dullsville? Not in the view of one noted value investor, Charles Brandes, president of Brandes Investment Management in San Diego. Brandes sees slow-but-steady British Steel as the market's most tempting stock from a value perspective. "The company has very, very low debt," he notes, "and a book value of $37 a share." That's $12 above its current price.

British Steel has an enviable franchise. In Britain, it accounts for three-quarters of all crude-steel production, and it's the second-largest steel producer in Europe, with distribution channels in 17 countries throughout the Continent and Asia. For the fiscal year ending Mar. 31, analysts expect revenues approaching $9.8 billion. But despite British Steel's formidable size and the brisk trading of its ADRs here, the company has only a sparse following on Wall Street.

CASH HOARD. True, weak prices and reduced demand in Britain cut into sales and earnings over the past year. But few steelmakers are in stronger financial shape: The company has $1.7 billion in cash. Indeed, British Steel has deployed some of that cash hoard into American steel ventures. It recently agreed to acquire Alabama's Tuscaloosa Steel, and in January it announced the signing of a letter of intent with Bethlehem Steel. British Steel is exploring a joint venture with Bethlehem to produce and market structural and rail products. The company has also purchased a 45% stake in Spain's Aristrain Group and is well-positioned to engage in similar ventures worldwide.Brandes expects British Steel's earnings to weigh in at $2.75 a share in the soon-to-end fiscal year, vs. $3.53 a year ago (adjusted for U. S. accounting principles). Despite the decline, Brandes is buying the stock on the theory that the market will begin to recognize the benefit the company will soon reap from improved worldwide steel demand and a mending British economy.

Britain has been in a recession longer than the U. S. has and might well emerge from it sooner, he notes. Meanwhile, investors can enjoy a high and easily sustainable dividend yield of 8 1/2%. So even if British Steel doesn't generate the heat of a blast furnace, it should continue to warm investors' hearts.GARY WEISS


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