RIO Tinto (RTNTF): A high dividend yield and strong margins make RTNTF stock a buy.
Vale (VALE): The positive outlook for iron ore prices and nickel in the long-term, two of its key products, should continue to support Vale’s shares.
BHP (BHP): Strong anticipated bottom-line growth and cheap valuation metrics constitute an opportunity for investors seeking exposure to the steel complex.
ArcelorMittal (MT): This leading steelmaker lagged behind other steel stocks, but the move looks excessive given the bullishness of the commodity price cycle.
Anglo American (NGLOY): Free cash flow is expected to inflate, sustaining the stock of this diversified mining giant.
ThyssenKrupp (TYEKF): The stock has been hammered, but TYEKF trades at ultra-cheap valuation metrics.
Eramet (ERMAY): Despite gaining 100% year-to-date, the high-value alloy firm has strong financials and trades relatively low compared to U.S. steel stocks.
Steel stocks: rods, bars and other forms of steel
Source: Shutterstock
Steel stocks have gained traction in the past two years due to rebounding demand that emerged after Covid-19 restrictions. This month, U.S. steel coil future contracts rose to $1,515 per ton amid ramping supply shortage risks led by a new wave of lockdowns in China, the world’s top steel producer.
In addition, high energy prices have forced steel manufacturers to increase prices, boding well for the industry. Russia’s invasion of Ukraine and the resulting sanctions provide additional catalysts for the industry, as Russia is the fifth-largest global steelmaker. Furthermore, as China plans tax cuts to spur investment and consumption, the bullishness of steel stocks is unlikely to halt.
Steel markets, measured by the VanEck Steel ETF (NYSEARCA:SLX), advanced robustly this year, posting a year-to-date (YTD) surge of 26% to $67.70 per share. With this lift, steel stocks have largely outperformed the equity market YTD, following the decline of 6% to $449.44 in SPDR S&P 500 Trust ETF (NYSEARCA:SPY).
RIO Tinto (OTCMKTS:RTNTF) is a global leader in mining operations and prospection. The company has a 71.6% exposure to iron ore, a key material used for steelmaking. Since the beginning of the year, RIO Tinto’s shares have gained 16.7%, moderately underperforming the steel complex.
Top-line growth is expected to shrink by 7% this year to $58.9 billion versus $63.5 billion in 2021, as labor shortages due to the pandemic should continue to linger. Net profits are projected to dip even more, down 14.8% year-over-year (YOY) to $18 billion in 2022.
Nevertheless, the steelmaker’s net margins are estimated to remain strong, standing at 30.5% per year in 2022. Besides, the outlook of iron ore prices remains strong, sustaining the strong profitability of RTNTF.
Despite that, Rio Tinto is well-capitalized with a net cash position of $1.6 billion at the end of 2021. It offers a high estimated dividend yield of 9.7% in 2022.
The steel company trades at low valuation multiples, posting a 2022 enterprise value (EV) on earnings before interest, taxes, depreciation, and amortization (EBITDA) of only 3.9x and a forward price-to-earnings (P/E) ratio of 7.4x.
Vale (VALE)
the Vale (VALE) logo displayed on a mobile phone with the company's webpage in the background
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Vale (NYSE:VALE) is a Brazil-based mining company and the world’s largest producer of iron ore, pellets and nickel. Since the beginning of the year, VALE outperformed its peers, as the mining stock soared 44.8% to $20 per share.
Vale’s fundamentals remain robust despite an expected weakening of its activity this year. Indeed, analysts’ estimates indicate net sales will decrease 4.9% to $51.8 billion in 2022 after registering a rapid advance in 2021.
Net earnings are forecast to plunge 20.9% in 2022 to $17.7 billion, but it’s anticipated to still generate a comfortable profit margin of 34.3%. In terms of throughput, management anticipates increasing iron ore production to 320 million tons to 335 million tons in 2022 versus 315.6 million tons last year.
In addition, Vale’s net cash position is estimated to strengthen in 2022, reaching $5 billion versus net debt of $5.4 billion last year. In terms of valuation, the Brazilian mining giant is expected to deliver a yield of 10.9% in 2022 and posts low valuation metrics of a 3.2x forward EV/ EBITDA ratio and a 5.1x P/E ratio.
BHP Group (BHP)
A pile of iron ore granules on a black background.
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BHP (NYSE:BHP) is a global resources company, producing various commodities including iron ore, copper and coal. The company derived 56.7% of sales from iron ore in 2021. BHP’s shares performed in line with the steel complex YTD, advancing by 29.5% to $77.25 per share.
After increasing robustly in 2021, up 41.7% to $60.8 billion, revenues of the Australia-based resource giant are estimated to climb 7.6% this year to $65.5 billion. Net income on the other side is projected to soar 81.5% to $20.3 billion in 2022, bringing BHP’s profit margins to 31.3% per year.
With these sturdy growth prospects, BHP’s net debt is slim relative to its earnings, standing at $5.2 billion in 2022 and representing a low leverage ratio of 0.13x. Besides, BHP is expected to deliver a dividend yield of 9.1% this year.
With a forward EV/EBITDA ratio of just 3.1x and 2022 P/E ratio of 9.6x, the resource company is cheap relative to its growth prospects and is well-placed to benefit from a commodity super-cycle.
ArcelorMittal (MT)
steel stocks: several sheets of steel in a stack
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ArcelorMittal (NYSE:MT) is a leading integrated steel producer and ranks as the first steelmaker in the world. The steel giant underperformed the market since the beginning of the year. Arcelor’s shares decreased 4.2% YTD to $30.76 per share, even if the steelmaker beat revenue and earnings per share estimates in the fourth quarter of 2021.
With this underperformance, MT stock has plenty of room to catch up. While the group’s net sales are expected to decline marginally this year by 1.1% to $75.7 billion, net earnings are projected to plunge 30.1% to $10.4 billion. While these downturns weighed on MT stock price, the selloff seems overdone due to the strength of the upward commodity price cycle.
In terms of multiples, ArcelorMittal is undervalued compared to other steel stocks with a forward EV/EBITDA ratio of 1.7x and a 2022 P/E ratio of only 2.7x. These cheap metrics provide an attractive entry point for investors seeking exposure to the steel industry.
Anglo American (NGLOY)
a construction worker looks on as an excavator gets to work in a mine
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Anglo American (OTCMKTS:NGLOY) is a global mining company with considerable exposure to iron ore. Its shares have jumped 33.2% YTD to $27.40 per share, slightly outperforming the steel complex.
After surging significantly in 2021 — up 34.5% to $41.6 billion — NGLOY’s top line is expected to flatten this year, posting a slim net sales advance of 1.5% YOY to $42.1 billion. On the other side, net earnings skyrocketed 309.9% last year to $8.6 billion. After this rapid advance, net income is projected to advance moderately in 2022, up 4.9% to almost $9 billion.
More interestingly, Anglo American’s free cash flow (FCF) is estimated to appreciate significantly, supporting the shares of the global mining specialist.
In terms of price, NGLOY stock has attractive metrics and offers an attractive expected yield of 6%. The company trades at a 3.3x forward EV/EBITDA ratio and a 7.2x 2022 P/E ratio.
ThyssenKrupp (TYEKF)
a steel frame for a building
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ThyssenKrupp (OTCMKTS:TYEKF) is a German industrial and technology group with exposure to the steel market of 23.4% in 2021. The stock has been hammered since the beginning of the year, declining 33.1% to $7.46 per share after the company announced it will suspend cash-flow guidance due to Russia’s invasion of Ukraine.
However, top-line growth is expected to advance moderately in 2022 by 6.6% to 36.2 billion euros. On the other side, after a net loss of 115 million euros last year, net income is anticipated to turn positive this year and reach 1.1 billion euros. With this rapid advance, net margins should top at 3.1% in 2022.
In spite of that, the company has a healthy balance sheet with a net cash position of 3.6 billion euros at the end of 2021. After breaking even last year, TYEKF stock should continue to benefit from bullish steel prices.
TYEKF stock trades at ultra-cheap multiples, with a 2022 EV/EBITDA ratio of 0.1x and a forward P/E ratio of 3.8x. In addition, the market consensus anticipates an average target price of $14.35 per share, representing an upside of nearly twice today’s price.
Eramet (ERMAY)
construction workers point at mining equipment in the near distance
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Eramet (OTCMKTS:ERMAY) is a global mining and metallurgical group. It’s a key player in the elaboration and transformation of high-value alloys. Eramet shares have skyrocketed 100% YTD to $16.73 per share, outperforming the broader market and steel peers.
The alloys specialist is expected to grow rapidly this year, with net sales up 30.3% YOY to 4.8 billion euros. Net profit, on the other hand, is projected to advance even faster, up 158% to 771 million euros with a net margin of 16.1%.
Net debt reached 936 million euros in 2021 and is forecasted to shrink 47.2% this year to 494 million euros, representing a leverage ratio of just 0.3x.
With these strong financials, the France-based metallurgical specialist has low multiples, trading at only a 2.8x 2022 EV/EBITDA ratio and a 5.7x forward P/E ratio.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies.
