Cash for clunkers - minus the clunkers
Looking for a way to benefit from cash for clunkers even if you're not trading in an old gas guzzler? Some analysts say buy steel companies and scrap recyclers.
 |
| Shares of steelmakers U.S. Steel and AK Steel and scrap recycler Schnitzer Steel have soared during the past three months, far outpacing the gains of the broader market. |
NEW YORK (CNNMoney.com) -- Congress has finally passed the so-called "cash for clunkers" bill and President Obama is expected to soon sign it into law. So if you have an old gas guzzler you've been wanting to trade in, you could wind up getting a voucher for a new car.
But even if you already own a fuel-efficient car -- or even no vehicle at all -- you might be able to benefit. Some analysts think that steel companies and scrap recyclers could get a bump in demand and be worth buying.
The cash for clunkers bill could boost new auto sales by between 200,000 and 400,000 vehicles in the second half of the year, according to some estimates.
That's not a huge amount. But any bit could help the depressed steel industry, which counts the auto companies among its biggest customers.
U.S. Steel (X, Fortune 500) ("Michael, we're bigger than U.S. Steel!"), AK Steel Holding (AKS, Fortune 500) and Arcelor Mittal (MT), the Luxembourg-based company that is the world's largest steel producer, could all see a boost.
Sales to the transportation industry, including the automotive sector, accounted for 13% of U.S. Steel's revenue in 2008, according to filings with the Securities and Exchange Commission. And nearly a third of AK Steel's sales last year came from the auto industry.
So it goes without saying that anything that helps to turn around auto sales could be welcome news for steel companies.
In fact, Morgan Stanley steel analyst Mark Liinamaa upgraded shares of U.S. Steel and AK Steel earlier this month. In his report, he specifically cited AK Steel as a company that could benefit as the program "could significantly boost auto steel sales."
Talkback: Will cash for clunkers help boost auto sales? Are you interested in participating in the program? Leave your comments at the bottom of this story.
There may be other beneficiaries too. Eric Prouty, an analyst with Canaccord Adams, pointed out in a report last week that scrap recycling firms such as Schnitzer Steel Industries (SCHN), SIMS Metal Management (SMS) and Metalico (MEA) (not to be confused with heavy metal legends Metallica) could also see extra sales.
"The junking of old cars would help create more scrap for these recyclers to process, while the production of new vehicles would generate manufacturing-related scrap and lead to an increase in overall steel demand," Prouty wrote.
Of course, investors shouldn't expect a tidal wave of business for these companies.
"The number of scrapped vehicles is likely to be relatively small compared with the overall volume of scrap material generated in the US each year," Prouty wrote. "As a result, any impact on scrap prices is likely to be minimal. Still, scrap processors would be happy to get their hands on any additional material," he said.
In addition, the fundamentals for steel companies remain incredibly weak. U.S. Steel and AK Steel are both losing money and are not expected to return to profitability until 2010.
But there are some signs of improving demand. U.S. steel industry leader Nucor (NUE, Fortune 500) sparked a rally across the entire sector last week when chairman and CEO Dan DiMicco said in a statement that "order entry has improved in recent weeks." Nucor, nonetheless predicted a quarterly loss for the second quarter, albeit a narrower loss than it posted in the first quarter.
Finally, it's also worth pointing out that shares of many steel companies have soared since early March as hopes of an economic recovery have taken root and commodity prices have taken off.
Shares of U.S. Steel and Schnitzer Steel have more than doubled in the past few months while AK Steel's stock has tripled.
That probably means that a lot of momentum oriented traders have been bidding the stocks higher and that much of the expected increase in demand later this year could already be priced into the stocks.
Still, if you are confident that the economic recovery is for real and that cash for clunkers will be a big success for the auto industry, the steel stocks are probably not a bad bet -- even after their surge.
Just keep in mind that they are going to be extremely volatile. Any hint that the worst may not be over for the auto sector and the broader economy could send these stocks tumbling once again.
In fact, that's exactly what happened Monday in the midst of a broad market sell-off on fears about the health of the global economy. U.S. Steel and Arcelor Mittal each fell 7% while AK Steel plunged 10%.
So investors need to be careful or they could wind up exchanging cash for stocks that turn out to be clunkers.
Talkback:Will cash for clunkers help boost auto sales? Are you interested in participating in the program? 
