Globe & Mail Stelco is up 1000% in 16 months and analysts are convinced more gains - and special dividends - are on the way
Record steel prices have pushed shares of Stelco Holdings Inc. to all-time highs, and analysts believe the stock will keep climbing. There’s also growing speculation investors could receive another special dividend payout in the near future.
The Hamilton-based steelmaker’s stock closed Wednesday at $37.37 on the TSX, up 39 cents and not far off its record high of $39.01, hit on May 10 on the back of strong first-quarter financial results. The revamped Stelco, which went public at $17 a share in November, 2017, was added to the S&P/TSX Composite Index in June, a move that has helped support its strong stock price.
The stock is up more than 1,000 per cent from its record low of $3.24 in mid-March, 2020, when the COVID-19 pandemic put the global economy into lockdown and steel demand and production plummeted.
The price of hot-rolled coil steel, a key commodity used in construction and automobiles, is currently trading near record levels above US$1,800 per ton, compared with about US$600 a ton in early 2020. The price has been driven up by rising demand and shortages of supply across steel-heavy industries that are boosting output as the economy reopens.
“Steel prices continue to rally with no immediate signs of easing,” National Bank analyst Maxim Sytchev wrote in a recent note, while hiking his Stelco share price target to $54 from $45. All nine analysts who cover the stock have a “buy” recommendation on it and a handful have recently increased their price targets. The average target is $46.25, which implies a 24-per-cent gain from Wednesday’s close.
Mr. Sytchev expects the second and third quarters to be “exceptionally strong” for Stelco as it continues to benefit from the commodity price rally. He forecasts steel prices to average around US$1,252 per ton this year and US$800 a ton in 2022.
Stelco’s first-quarter revenue climbed by 49 per cent, year over year, to $665-million, driven largely by rising steel prices. Adjusted income was $155-million, or $1.75 per share, versus a loss of $26-million, or 29 cents, in the same quarter a year earlier. Analysts expect revenue of $894-million and adjusted earnings of $3.89 per share for the second quarter, according to Refinitiv data.
Amid the cash buildup, analysts expect the company to announce another special dividend payment, which it did twice before the pandemic. The company suspended its 10-cent regular quarterly dividend when the pandemic hit last spring, then reinstated it this year.
Cormark Securities analyst David Ocampo, who has a $49 price target on the stock, expects the company to return capital to shareholders through dividends and buybacks.
Mr. Ocampo said he spoke with management on Wednesday and they indicated they expect to provide more details on potential buybacks or special dividends “by September.”
He also noted the company is in the process of selling its land in Hamilton, one of the hottest real estate markets in Ontario right now, for an anticipated $400-million to $500-million. The company would likely lease back the portion of its land it is using, he says, which is about 250 acres.
“Stelco offers investors strong leverage to steel with its highly fixed, low-cost operations and we expect the company to generate robust free cash flow and earnings at current spot and forecast steel prices,” RBC Dominion Securities analyst Alexander Jackson said in a recent note. His target is $46.
Risks include commodity price swings and domestic and international competition, Mr. Jackson notes. Also, he says the steel industry is a large carbon emitter, which means it could face challenges with environmental regulation and access to capital markets “due to shifting investor preferences and potential environmental impacts from steel production.”
Jamie Murray, portfolio manager and head of research at Murray Wealth Group, says his firm has owned Stelco since 2018, but has been taking profits every so often as “position management.” Stelco accounts for about 2 per cent of the firm’s global equity fund and 4 per cent of its Canadian stock portfolio.
He says the firm plans to keep holding the stock, describing it as a well-run, low-cost producer that’s “very shareholder-friendly.”
Jennifer Radman, head of investments and senior portfolio manager at Caldwell Investment Management Ltd., says her firm bought Stelco shares in its Caldwell Canadian Value Momentum Fund in October and it’s still one of the fund’s top five names.
“We continue to see the company execute on its initiatives, but it’s also just a very strong commodity pricing environment,” she says.
Ms. Radman is also encouraged that Stelco chief executive officer Alan Kestenbaum is a major shareholder, with about an 8.5-per-cent stake in the company, according to Refinitiv. That suggests he’s “very much aligned to keep growing shareholder value,” she says.
Still, Ms. Radman is cautious about how long Stelco can maintain its current trajectory, assuming steel prices will eventually pull back.
“We’re still pretty keen on it, but it’s ultimately what the commodity price does,” she says.