China’s production cuts caused a global supply crunch and pushed steel and iron ore prices higher in 2021. Although domestic steel producers have since benefited, the war between Russia and Ukraine, two major participants in the international steel trade, has been exacerbating the global shortage, thus driving steel prices even higher.
Domestic steel manufacturers are raising prices to capitalize on the growing demand and to combat rising input costs due to high oil, natural gas, and electricity prices. Also, significant funding from the bipartisan infrastructure bill passed last fall, along with the easing of tariffs on steel imports from the EU and Japan, should drive the industry’s growth in the future. Investors’ interest in this space is evidenced by the VanEck Vectors Steel ETF’s (SLX) 6.4% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The global iron and steel market is expected to grow at a 2.9% CAGR to$1.88 trillion by 2028.
Budding small-cap steel companies TimkenSteel Corporation (TMST), Insteel Industries, Inc. (IIIN), Mesabi Trust (MSB), Synalloy Corporation (SYNL), and Friedman Industries, Incorporated (FRD), which are currently trading at reasonable valuations, are well-positioned to capitalize on the industry tailwinds. So, we think these stocks could be solid bets now.
TimkenSteel Corporation (TMST)
With an $880.50 million market cap, TMST in Canton, Ohio, manufactures and sells alloy steel and carbon and micro-alloy steel products internationally. The company’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), manufactured components, such as precision steel components and billets. It serves the automotive, oil and gas, industrial equipment, mining, construction, rail, defense, heavy truck, agriculture, power generation, and oil country tubular goods sectors.
On October 13, 2021, TMST announced that it would increase its base pricing on all special bar quality (SBQ) products by $60 per ton, effective for shipments beginning Nov. 1, 2021. This should help TMST overcome its rising input costs and maintain or increase its profit margins in the coming months.
For its fiscal year 2021, fourth quarter, ended Dec. 31, 2021, TMST’s net sales increased 60.2% year-over-year to $338.30 million. The company’s gross profit came in at $55.40 million, up 290.1% from the prior-year period. Its adjusted EBIT was $47.10 million, representing a 1021.1% increase from the prior-year period. While its adjusted net income increased 6950% year-over-year to $42.30 million, its adjusted EPS grew 7900% to $0.80. The company had $259.60 million in cash and cash equivalents as of Dec. 31, 2021.
The $3.27 consensus EPS estimate for its fiscal year 2022, ending Dec.31, 2022, represents a 1.9% rise from the prior-year period. Analysts expect TMST’s revenue to improve 11.4% year-over-year to $1.43 billion. Also, it surpassed the Street’s EPS estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 33.7% in price and closed yesterday’s trading session at $19.01. TMST’s trailing-12-month ROE, ROA, and ROTC are 29.2%, 11.6%, and 18.8%, respectively.
In terms of forward EV/Sales, TMST is currently trading at 0.48x, which is 72.3% lower than the 1.72x industry average. And in terms of forward Price/Book, TMST is currently trading at 1.11x, which is 49.9% lower than the 2.22x industry average.
TMST’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an A grade for Growth and Momentum and a B grade for Value and Quality. Click here to see the additional ratings for TMST’s Stability and Sentiment.
TMST is ranked #11 of 33 stocks in the A-rated Steel industry.
Insteel Industries, Inc. (IIIN)
With a $723.74 million market cap, IIIN manufactures and markets steel wire reinforcing products for concrete construction applications internationally. The Mount Airy, N.C., company offers prestressed concrete strand (PC strand) and welded wire reinforcement (WWR) products. It sells its products through sales representatives to the manufacturers of concrete products, rebar fabricators, distributors, and contractors.
For its fiscal year 2022 first quarter, ended Jan.1, 2022, IIIN’s total net revenues increased 49.2% year-over-year to $178.46 million. The company’s gross profit came in at $42.36 million, representing a 113.4% rise from the year-ago period. Its EBIT was $30.03 million for the quarter, indicating a 183.1% year-over-year improvement. IIIN’s net earnings came in at $23.13 million, up 184% from the prior-year period. Its EPS increased 181% year-over-year to $1.18. It had $63.02 million in cash and cash equivalents as of Jan. 1, 2022.
Analysts expect the company’s EPS to rise 21.9% year-over-year to $4.29 for its fiscal year 2022, ending Sept. 30, 2022. The $719.02 million consensus revenue estimate for the same fiscal year represents a 21.7% rise from the prior-year period. It surpassed the Street’s EPS estimates in each of the trailing four quarters. The company’s EPS is expected to grow at a 13% rate per annum over the next five years.
Over the past three months, the stock has declined 3.8% in price to close yesterday’s trading session at $37.28. IIIN’s trailing-12-month ROE, ROA, and ROTC are 30.8%, 19.9%, and 25.3%, respectively.
In terms of forward EV/Sales, IIIN is currently trading at 0.93x, which is 45.9% lower than the 1.71x industry average. Its 2.10x forward Price/Book is 17.7% lower than the 2.55x industry average.
IIIN’s POWR Ratings reflect its solid prospects. It has an overall A rating, which equates to Strong Buy in our proprietary rating system.
The stock has a B grade for Growth, Value, Sentiment, and Quality. In addition to the POWR Ratings grades we have just highlighted, one can see IIIN’s Momentum and Stability ratings here.
IIIN is ranked #8 in the Steel industry.
Mesabi Trust (MSB)
New York City-based MSB is a royalty trust that is in the iron ore mining business in the United States. The Trust derives income from the Peter Mitchell Mine, an iron mine located near Babbitt, Minn., at the eastern end of the Mesabi Iron Range. The lessee/operator of MSB’s mineral interests is Northshore Mining Corporation (NMC), a subsidiary of Cliffs Natural Resources Inc. It has a market capitalization of $25.92 million.
MSB’s total revenues for its fiscal 2021 third quarter ended October 31, 2021, increased 185.1% year-over-year to $16.36 million. The company’s net income came in at $15.99 million, representing a 212% year-over-year improvement. As of Oct. 31, 2021, the company had $45.86 million in cash and equivalents.
MSB stock has gained 19.3% in price over the past three months and ended yesterday’s trading session at $25.92. Its trailing-12-month ROE, ROA, and ROTC are 251.1%, 105.7%, and 157.2%, respectively.
In terms of trailing-12-month EV/EBIT, MSB is currently trading at 4.98x, which is 59.4% lower than the 12.25x industry average. Its 6.50x trailing-12-month Price/Cash Flow is 32.1% lower than the 9.57x industry average.
MSB’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
It has an A grade for Quality. Click here to see the additional ratings for MSB’s Growth, Momentum, Sentiment, Value, and Stability.
MSB is ranked #20 in the Steel industry.
Synalloy Corporation (SYNL)
With a $174.41 million market capitalization, SYNL in Richmond, Va., manufactures and sells metals and specialty chemicals internationally. The company manufactures lubricants, surfactants, defoamers, reaction intermediaries, and sulfated fats and oils. It also provides chemical tolling manufacturing resources to global and regional chemical companies and contracts with other companies to manufacture certain, pre-defined products.
On Oct. 25, 2021, SYNL acquired DanChem, a leading, full-service specialty chemicals contract manufacturing organization, for $32.950 million to accelerate its product development capabilities and provide an entrance into new end markets and applications. DanChem’s robust manufacturing capabilities, a highly experienced team, and a blue-chip customer base should bolster SYNL’s chemical operations while providing significant opportunities to grow into new end markets with a wide array of commercial offerings.
For its fiscal year 2021 third quarter, ended Sept.30, 2021, SYNL’s net sales increased 45.4% year-over-year to $86.18 million. The company’s pre-tax income came in at $10.38 million, versus a $13.07 million loss in the year-ago period. SYNL’s net income was $8.20 million for the quarter, compared to a $10.54 million loss in the prior-year period. Its EPS came in at $0.87, versus a $1.16 loss per share in the year-ago period. It had cash and cash equivalents of $1.17 million as of Sept. 30, 2021.
Over the past three months, the stock has gained 22.1% in price and ended yesterday’s trading session at $17.16. SYNL’s trailing-12-month ROE, ROA, and ROTC are 4%, 5.2%, and 6.3%, respectively.
In terms of forward EV/Sales, SYNL is currently trading at 0.88x, which is 53% lower than the 1.87x industry average. SYNL’s 1.76x forward Price/Book is 22.4% lower than the 2.26x industry average.
SYNL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system.
It has an A grade for Momentum and a B grade for Value, Growth, Quality, and Sentiment. Click here to see the additional ratings for SYNL’s Stability.
SYNL is ranked #11 in the Steel industry.
Friedman Industries, Incorporated (FRD)
With a $54.99 million market capitalization, FRD in Longview, Tex., engages in steel processing, pipe manufacturing and processing, and the steel and pipe distribution businesses. The company operates in two segments: Coil and Tubular.
For its fiscal 2021 third quarter, ended Dec. 31, 2021, FRD’s net sales increased 81.2% year-over-year to $51.66 million. FRD stock has gained 15.6% in price over the past three months and ended yesterday’s trading session at $8.02. Its trailing-12-month ROE, ROA, and ROTC are 39.8%, 25.7%, and 33.1%, respectively.
In terms of trailing-12-month EV/Sales, FRD is currently trading at 0.27x, which is 85.5% lower than the 1.87x industry average. FRD’s 0.64x trailing-12-month Price/Book is 71.9% lower than the 2.26x industry average.
FRD’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system.
It has an A grade for Growth, Value, and Momentum and a B grade for Quality. Click here to see the additional ratings for FRD (Sentiment and Stability).
FRD is ranked #9 in the Steel industry.
TMST shares were trading at $19.88 per share on Tuesday afternoon, up $0.87 (+4.58%). Year-to-date, TMST has gained 20.48%, versus a -11.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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