Citi upgrades Nucor to buy and cuts Cleveland-Cliffs to neutral in steelmaker ratings swap

By Steve Gelsi

Analyst Alexander Hacking said Citi remains a 'steel sector bull' for the time being

Citi analyst Alexander Hacking on Wednesday flipped preferences on two major steel stocks against what he sees as a favorable period for the sector.

"We remain mid-term steel bulls but acknowledge the slowing U.S. economy as a key risk (steel stocks won't outperform in a recession)," Hacking said.

The business continues to benefit from structural improvements in supply, as well as demand stemming from U.S. government support for infrastructure and manufacturing, he said.

Nucor Corp (NUE) was upgraded to buy from hold, while Citi cut its rating on Cleveland-Cliffs Inc. (CLF) to neutral from buy.

Nucor stock dropped 0.2% on Wednesday, while Cleveland-Cliffs moved lower by 1.4%.

Citi boosted its price target for Nucor to $240 a share from $180 a share and kept its $22 price target for Cleveland-Cliffs.

A roughly 35% higher multiple for Nucor is justified by an estimated return on invested capital (ROIC) of 15% to 20%, Hacking said.

"The stock is underrated relative to its return on invested capital and free cash flow," Hacking said. "We expect investors to be quite skeptical on this argument, but that's the opportunity."

Meanwhile, Cleveland-Cliffs has faced steeper expenses that have eaten into its earnings before interest, taxes, depreciation and amortization (Ebitda), he said.

"Revenues [for Cleveland-Cliffs] have been as good as advertised - if not better - based on strong volumes, record auto steel prices, and resilient hot-rolled coil but higher costs have led to underwhelming Ebitda," he said.

Citi also reiterated a buy rating on Steel Dynamics Inc. (STLD) and boosted its price target on the stock to $160 a share from $130 a share. Steel Dynamics stock was up by 0.5% on Wednesday.

Including Wednesday's stock price moves, Nucor is up 4.9% so far in 2024, while Cleveland-Cliffs is down by 1.4%, while Steel Dynamics is up by 11.8%. The S&P 500 SPX has risen by 8.3% so far this year.

Also read: Steel maker Nucor expects fourth-quarter profit to drop from the previous quarter on lower pricing and reduced volumes

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-13-24 1017ET

Copyright (c) 2024 Dow Jones & Company, Inc.