4 Top Steel Stocks for a U.S. Infrastructure Expansion

The highly cyclical steel industry received a boost recently with the unveiling of President Trump's new infrastructure plan, with an emphasis on expanding industry and creating jobs. Not only is the plan to expand infrastructure a lift for the industry, but the President's focus on utilizing American-made steel gives certain companies an advantage over the competition -- mainly, Chinese steel.

Steel is a fairly saturated industry, so it might be hard to pinpoint which companies are poised to run away from the pack with the impending industrial developments. U.S. companies, like Nucor Corporation (NUE 0.35%), Steel Dynamics (STLD 2.07%), and United States Steel Corporation (X 0.43%), are in a prime position to reap the benefits of a new American infrastructure plan. That being said, international stalwarts like ArcelorMittal (MT 0.99%) still have a huge role in industrial expansion in the U.S. and in China.

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Source: Yahoo! Finance. Return data as of 7/27/2017.

Efficiency and consistency

Nucor is the largest U.S. steel corporation and produced over 22 million tons of steel in 2016. Not only is Nucor largest American steel producer, it's also one of the most diversified steel operations in the industry. With competitors focusing largely on sheet-metal production, Nucor has its hands in most aspects of production, including sheet, bar, plate, finished products, and reinforced steel production. The 70-year-old company is also one of the most efficiently run companies in the industry.

Nucor's commitment to using electric arc furnaces means it can produce large volumes of steel with less energy than blast furnaces. Just last year, Nucor reported an 87% increase in net profits, while also lowering costs. Nucor also provides a great value to investors,  at over 16 times earnings. Not only is it one of the big boys in the steel industry, but it's a model of consistency, having just recently announced its 177th consecutive cash dividend.

New kid on the block

Steel Dynamics is a stock that closely resembles Nucor's movement in 2017. In fact, Credit Suisse analysts also recently moved Steel Dynamics rating to outperform. The company's recent trajectory is also similar to Nucor: a sharp rally in late 2016 on the eve of the U.S. election and a downturn in price since the beginning of the new year.

Despite the slowly descending share price, Steel Dynamics offers a lot of value to potential investors. The stock trades just over 17 times earnings and offers a steady 1.65% dividend. It also has generated a ton of cash flow in the past year, and runs a tight financial ship, posting $412.43 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in Q1 2017, a 100% change from Q1 2016. And despite being founded less than 25 years ago, Steel Dynamics is the fourth-largest producer of steel products in the United States.

Looking to bounce back

Of the previously mentioned steel stocks, U.S. Steel might be the least attractive buy based on financials, as its earnings per share (EPS) is just .16 and the stock price has been hammered recently due to bad Q1 earnings and management slashing its EBITDA guidance. Despite the negative first quarter, the price has bounced back nicely in Q2, turning what was a negative EPS back positive, and posting a profit of $261 million, after losses of $46 million from a year ago. In the past month, U.S. Steel is up 19.33%.

Even with the low EPS, the company has made strides in bringing it down from a loss last summer. There was a lot of work done to transform a negative free cash flow in Q1 2016 to positive in less than a year.

The common theme with these U.S. producers is the President's focus on American-made steel for many infrastructure plans. This should reduce the amount of imported steel in the short term. Tariffs on foreign steel mills should help U.S. Steel, as well.

There's still an air of uncertainty regarding U.S. Steel, as Axiom Capital predicts another EBITDA slash in the near future. Despite this bearish view, there are still a number of analysts predicting U.S. Steel will perform well, though the road ahead is more uncertain than that of Nucor and Steel Dynamics.

An international giant

With American steel still in a prime position for expanded U.S. infrastructure, heavyweight ArcelorMittal is still the kingpin in the international steel market. The Luxembourg-based conglomerate is the largest producer in the world, with a $19B market cap, and is a consistent performer in the industry. Its recent Q1 results have given investors plenty to smile about, with growth in operating income ($1.6 billion, up 100% from Q4 2017), steel performance (+5.1% quarter over quarter), and mine performance (+21% quarter over quarter).

The company also increased its net income to $1 billion and saw EBITDA come in at $2.2 billion, up from the $900 million reported in Q1 2016. Even with the performance, ArcelorMittal is an undervalued stock, with the share price hovering around $20, which is 32% below the average one-year price target. One potential red flag is that it could suffer from the proposed stance on American reliance on U.S.-produced steel products, but higher tariffs on Chinese steel could still make ArcelorMittal a valuable play in U.S. infrastructure expansion.

Steel the spotlight

With infrastructure a key point in President Trump's budget overhaul, investors are intrigued by the prospect steel will play in an overhaul of thousands of roads and buildings. What's more, the promise of using American-made steel for new projects means Nucor, Steel Dynamics, and US Steel are in prime position to make a play. But international powerhouses like ArcelorMittal still have a lot of sway over the direction steel goes, internationally, and will still be a player in the US steel market.