- Banc of America is initiating a host of steel names:
* United States Steel Corporation (NYSE:X) is initiated with Buy rating and $75 tgt. Firm notes their contrarian call is based on view that steel fundamentals should remain fairly strong heading into 2007. While some datapoints suggest that prices could weaken, they believe the industry will be proactive in cutting production and reducing inventories to maintain supply-demand balance. Firm believes peak prices and EPS will be realized in 2007. X is also well positioned to benefit from strategic catalysts in a consolidating industry. Firm believes X trades at a 35-40% discount to its breakup value.
Fixed cost leverage a plus, as long as steel prices go up. US Steel's higher fixed cost base translates into higher EPS leverage when steel prices are going up. Given their positive industry view for 2007, they believe X stock is well positioned for a recovery.
Cash flow options should support stock. Given firm's EPS forecasts, US Steel should be able to generate in excess of $2 billion of free cash flow in 2006 and 2007. US Steel's underleveraged balance sheet provides flexibility to pursue strategic opportunities. In addition, they expect the company to maintain its share repurchase program.
* Steel Dynamics (NASDAQ:STLD) is initiated with Neutral and $64 tgt. Firm's EPS forecasts are $7.10 for 2006, $7.25 for 2007, and $5.00 (normalized). At this point in the cycle, they believe risk-reward in the stock warrants a neutral. While STLD is well positioned for growth and could be a beneficiary of industry consolidation, the stock may continue to pullback near term. They'd view the stock more positively in the high $40 range ahead of a potential year end rally.
Robust growth pipeline. Steel Dynamics should benefit from its leverage to nonresidential construction through its flat rolled and structural steel businesses. The company also has a full pipeline of growth projects including the expansion of the Columbia City mill and addition of downstream finishing capabilities. Steel Dynamics is also realizing synergies from the recent Roanoke acquisition. In the future, the company may consider a West Coast greenfield mill or expansion of its Pittsboro bar mill.
Free cash flow to drive shareholder returns. In firm's view, STLD has become a more cash flow driven story. Despite a higher capital spending outlook, they expect Steel Dynamics to generate $400mm+ of cumulative free cash flow in 2006 and 2007. Most free cash will be used to fund growth investments, but some capital being returned to shareholders too. Management interests are well aligned with shareholders.
Note: NUE is initiated with Neutral and $54 tgt.
Notablecalls: Was talking to a technically oriented trader this AM and he said that several steel names have a bouncy feel to them. He'll be looking at X as this one's got the best rating.
* United States Steel Corporation (NYSE:X) is initiated with Buy rating and $75 tgt. Firm notes their contrarian call is based on view that steel fundamentals should remain fairly strong heading into 2007. While some datapoints suggest that prices could weaken, they believe the industry will be proactive in cutting production and reducing inventories to maintain supply-demand balance. Firm believes peak prices and EPS will be realized in 2007. X is also well positioned to benefit from strategic catalysts in a consolidating industry. Firm believes X trades at a 35-40% discount to its breakup value.
Fixed cost leverage a plus, as long as steel prices go up. US Steel's higher fixed cost base translates into higher EPS leverage when steel prices are going up. Given their positive industry view for 2007, they believe X stock is well positioned for a recovery.
Cash flow options should support stock. Given firm's EPS forecasts, US Steel should be able to generate in excess of $2 billion of free cash flow in 2006 and 2007. US Steel's underleveraged balance sheet provides flexibility to pursue strategic opportunities. In addition, they expect the company to maintain its share repurchase program.
* Steel Dynamics (NASDAQ:STLD) is initiated with Neutral and $64 tgt. Firm's EPS forecasts are $7.10 for 2006, $7.25 for 2007, and $5.00 (normalized). At this point in the cycle, they believe risk-reward in the stock warrants a neutral. While STLD is well positioned for growth and could be a beneficiary of industry consolidation, the stock may continue to pullback near term. They'd view the stock more positively in the high $40 range ahead of a potential year end rally.
Robust growth pipeline. Steel Dynamics should benefit from its leverage to nonresidential construction through its flat rolled and structural steel businesses. The company also has a full pipeline of growth projects including the expansion of the Columbia City mill and addition of downstream finishing capabilities. Steel Dynamics is also realizing synergies from the recent Roanoke acquisition. In the future, the company may consider a West Coast greenfield mill or expansion of its Pittsboro bar mill.
Free cash flow to drive shareholder returns. In firm's view, STLD has become a more cash flow driven story. Despite a higher capital spending outlook, they expect Steel Dynamics to generate $400mm+ of cumulative free cash flow in 2006 and 2007. Most free cash will be used to fund growth investments, but some capital being returned to shareholders too. Management interests are well aligned with shareholders.
Note: NUE is initiated with Neutral and $54 tgt.
Notablecalls: Was talking to a technically oriented trader this AM and he said that several steel names have a bouncy feel to them. He'll be looking at X as this one's got the best rating.
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