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Good times for steel stocks
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January 22, 1998: 2:45 p.m. ET
Prudential Securities analyst predicts strong earnings in the steel industry
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NEW YORK (CNNfn) - The steel industry seems to have plenty of strength despite events in Asia. That's the conclusion of Prudential Securities' steel analyst Kenneth Hoffman, who talked to CNNfn's Business Day about his predictions for the industry.
Following is a transcript of the interview.
STUART VARNEY, CNNfn ANCHOR, BUSINESS DAY: Kenneth, welcome to the program.
KENNETH HOFFMAN, STEEL ANALYST, PRUDENTIAL SECURITIES: Good morning.
VARNEY: An interesting situation developing here in Asia vis-a-vis the steel industry.
HOFFMAN: That's right.
VARNEY: What does Asia factor into the American steel market?
HOFFMAN: The good thing for Asia and the United States is they use different steel than what we use. We typically use what we call sheet steel, which would go in cars, the hoods and appliances and things of that nature. Remember, Asia has been building infrastructure and that's called structural steel. So while Asia has a lot of structural steel over there, they don't have the sheet steel which we need.
And with the United States and Europe doing very, very well, and China turning from a country which has built a lot of infrastructure to one that was using a lot of the sheet metal, we're actually seeing a very tight market -- prices rising. And I think later today we'll see some good earnings from some companies like USX-U.S. Steel (X) and Inland (IAD) and AK Steel (AKS).
VARNEY: So, America and Europe really can't use very much of the kind of steel produced now much more cheaply than Asia. It is not a plus for us in that sense.
HOFFMAN: That's exactly right. And what the market first saw and reacted to is when Asia had its problems, they sold off all heavy cyclicals, including steel. What they found is in certain cases, like aluminum and copper and nickel, that made tremendous amounts of sense. But in steel, that hasn't made sense. And you've seen these stocks perform quite a bit better than the average heavy cyclical.
We think what's happening with inventories in Europe non-existent, and the United States at better than three year lows, and with auto books from the steel mills at better than 15 year highs, that we'll see very good steel prices movements in 1998. And these stocks which are trading between 1-1/2 and 2-1/2 time cash flow are really being noticed by investors as we get into 1998.
VARNEY: Am I right - Bethlehem-Steel (BS), the symbol is BS, is that correct?
HOFFMAN: Yes.
VARNEY: It closed yesterday at 8-5/8. Where was it at just a few months ago?
HOFFMAN: Oh, and what you had in 1997 was the stock again started out -- we saw a new capacity coming into the U.S. The stock got down to 7. Then as people realized that the stock capacity wouldn't make sense -- there wasn't enough steel. The stock shot up to over 13. It was up almost 60 percent.
Then Asia hit, we've gone back to the same situation. The stock goes back down. In fact, it got as low as 7-1/2. It's started to work its way back up, and we think it has more run to go.
VARNEY: You'd buy it at 8-5/8?
HOFFMAN: I definitely would. In fact, we have a $22 price target looking 12 months outward. We're that confident that the steel market will be strong this year.
VARNEY: Well, Kenneth, my dear fellow, name another stock that looks very, very low but you're going to think doubles in the next year?
HOFFMAN: I'll give you another name, British Steel (BST). British Steel is a stock selling for about $21 a share. They have $11 (billion) in cash on the balance sheet, zero long term debt. They own a publicly traded company in Sweden called the Avesta Sheffield. It's worth another $6 a share.
So for $5 a share, you will get the third largest steel company in the world: cutting 25 percent of its workforce, even though it already is a very low cost producer, closed their corporate headquarters, laid off 70 percent of their staff - really restructuring. We think that stock could go 60 within two years.
VARNEY: It just took my breath away. OK. Tell me about Pohang Iron and Steel (PKX)? Korean stock if I'm not mistaken.
HOFFMAN: That's right.
VARNEY: I've got a few friends who've been trying to buy that thing, thinking that it's just going to go through the roof. Your opinion?
HOFFMAN: Pohang Iron and Steel, we do have a buy, but we call it the Pepto Bismol stock because it's going to be all over the place - very, very volatile. The newest steel company in the world. The second largest steel company in the world - very low cost.
When people focus on the factor of is Pohang a good company? Why is it trading at 20 percent price to book value, .2 price to book? They buy the stock and the stock should be higher.
When they focus on Korea and the problems of the Korean economy, then the stock gets hurt. We think as Korea calms down over the next year, Pohang will again start to rise. And so we have a buy on it, but it is a long term buy.
VARNEY: Well, let's not forget that Kenneth Hoffman said right here on video tape, British Steel will triple, and Bethlehem Steel will more than double in the year ahead.
HOFFMAN: You heard it here first.
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