When raw material shortages and economic growth coincide, it’s usually good for commodity producers.
That’s the situation Credit Suisse analyst Curt Woodworth sees for the steel companies under his coverage. Prices are getting squeezed higher as buyers look for product. As a result, he upgraded shares of
United States Steel
(ticker: X) and
(CLF) to Buy from Hold on Tuesday.
Woodworth’s target for Cleveland Cliffs goes to $24 from $21 a share. He raised his target for U.S. Steel stock more dramatically, to $35 a share from $15.
Both stocks jumped on Tuesday. U.S. Steel shares closed 7.9% higher at $26.63 on Tuesday even as the S&P 500 and Dow Jones Industrial Average were down for the day. Cliffs stock surged 11.8% to close at $20.36, despite the smaller price target bump.
The starting point for both stocks likely explains Tuesday’s reaction. U.S. Steel is up about 59% year to date, while Cliffs is lagging behind a little with a roughly 40% gain, even with the Tuesday’s stock spike.
It’s a bold call, but things are good for the sector right now. “It has been an extraordinary year for global steel markets, with flat rolled prices reaching record highs across all major regions including North America, Europe, and China in the past month,” wrote Woodworth in his 50-page report. Strong demand has “collided” with supply shortages across the globe.
“The current cycle is clearly super,” adds that analyst.
It might have to be a supercycle for the stocks to keep working higher. Steel prices have already more than tripled over the past year.
Woodworth, however, sees demand holding up with stable supply. That means pricing can remain higher than recent historical averages. What’s more, industry consolidation, led in part by Cliffs, should help profit margins and returns stay more stable than in prior cycles.
The risk the analyst sees, of course, is pricing volatility. Lower steel prices would mean lower steel stocks.
His call is out of consensus. For U.S. Steel stock, only three out of 14, or about 21%, of analysts covering the company rate shares Buy. The Buy-rating ratio for Cliffs shares is about 40%. Meanwhile, the average Buy-rating ratio for stocks in the S&P 500 is roughly 55%.
The average analyst target price for U.S. Steel stock is about $24 a share. That’s up more than 100% since the start of 2021 as analysts have upgraded the target price—without upgrading the stock—as steel prices have risen. But that is still more than $2 below where shares closed on Tuesday.
The average price target for Cliffs shares is $23 a share, still above its recent $20 level.
Write to Al Root at [email protected]