Market Updates on RUS (interesting)Market Updates on RUS: Breakout Stocks for March 31, 2010
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Russel Metals Inc. (RUS-TSX)
Rating: BUY
Target Price: $25.00
Potential Total Return: 30.0%
Current Price: $20.10
Market Cap: $1.1 billion
We increase our target price from $21.50 to $25.00. The dividend of $1.00 a share (a 5% dividend yield) is safe and we look for the shares to rise from the current $20.00 to $25.00 for a total return of 30%. Fundamentals continue to improve. Steel prices peaked in the third quarter of 2008 at over US$1,000 a tonne. Steel price bottomed in the second quarter of 2009 at US$400. To arrive at a normal ratio, either Russel Metals stock goes up (implying a lower dividend yield) or ten-year bond rates goes up.
1) To have the Russel Metals dividend yield equal to the ten-year bond yield (longer-term average of one) implies Russel stock increases to $28.50. The Russel dividend of $1.00 and a $28.50 stock price equals the current bond yield 3.5%.
2) To reach parity, bond yields move from 3.5% to 5.0%. We do not see this large increase in bond yields as a likely event as the economy is still weak.
3) We assume bond yield increases from 3.5% to 4.0% and the stock of Russel to increase to $25.00. At $25.00 with a $1.00 dividend the stock will yield 4.0%.This assumes no increases in the Russel dividend.
We are increasing our target price from $21.50 to $25.00. This implies a return of 30% from the current stock price of $20.00 (25% in capital appreciation and a 5.0% dividend yield).?We see the chance of a dividend reduction as remote as steel price increases have held and likely to increase.?Longer-term ratio is 1.0% i.e. bond yields equal dividend yield of Russel Metals.?Russel has $360 million in cash and $341 million in debt. The yearly obligation to pay the $1.00 dividend is $60 million or $15 million a quarter. High stock price for Russel stock is $34.00 Low stock price for Russel stock $9.90 Current $20.00
We see more good news and upside risk for Russel as opposed to downside/bad news for the company.
We feel investors are still looking at where the stock has come from (low of $9.90) rather than looking at where it can go (2008 high of $34.00). The stock may not reach $34, but $25.00 is very realistic.
BUY Russel (RUS-TSX)
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