The Zacks Analyst Blog Highlights:United States Steel, AK Steel Holding, Vale, Ternium, Phillips 66, Phillips 66 Partners and ConocoPhillips
CHICAGO, Feb. 18, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the United States Steel Corp. (NYSE:X-Free Report), AK Steel Holding Corporation (NYSE:AKS-Free Report), Vale S.A. (NYSE:VALE-Free Report), Ternium S.A. (NYSE:TX-Free Report), Phillips 66 (NYSE:PSX-Free Report), Phillips 66 Partners LP (NYSE:PSXP-Free Report) and ConocoPhillips (NYSE:COP-Free Report).
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Here are highlights from Friday's Analyst Blog:
Iron & Steel Stocks Structured to Beat
The prospects of the steel and iron industry are largely tied to the health of the global economy. The challenging global economic scenario that had for so long taken a toll on the iron and steel industry seems to be bottoming out. The U.S. economy has also been showing a gradual recovery. Fears of a slowdown in the world's second-largest economy, China, seem to have eased thanks to its latest positive numbers. Its neighbor, India, is also making its presence felt in the global steel market due to increasing urbanization. However, the Euro zone still continues to be an overhang.
Overcapacity has been a perennial problem for the industry and has significantly affected steel prices. Margins consequently came under pressure for the steel players. However, a reviving economy, strong momentum in the automotive market, and renewed vigor in construction activity, particularly in China, India and emerging markets, are sure to drive steel prices northward.
Increasing demand for steel will inevitably trigger demand for iron – its primary input. China is currently the largest producer of steel and for that reason the largest consumer of iron ore. The fate of iron ore prices now critically hinges on Chinese demand. China imported record levels of iron ore to start off the year. This is definitely a good omen for iron producers, which have been investing heavily in projects to augment their annual iron ore production capacity.
The iron and steel industry (which comes under the broader Basic Materials sector) has managed to produce impressive fourth-quarter results. Of the 75% stocks in the sector having reported their numbers for the final quarter of 2013, earnings increased 43.9%. The Basic Materials sector has a beat ratio (percentage of companies coming out with positive surprises) of 77.8%. Taking into account all the companies yet to report fourth-quarter results, earnings of the Basic Material sector are expected to increase at a healthy clip of 20.5% for the quarter.
Major surprises came up during this reporting season, leading to a rekindled interest in the so far faltering steel sector. After incurring losses through the major part of 2013, some notable steel names like United States Steel Corp. (NYSE:X-Free Report) and AK Steel Holding Corporation (NYSE:AKS-Free Report) returned to profits, delivering solid earnings surprises of 203.85% and 80%, respectively.
With the curtains set to fall on the fourth quarter earnings, it is wise to bet on the companies that have the potential to beat earnings in their upcoming releases. These companies are not only riding the favorable momentum in the steel space but also a beat would reinstate investor confidence in the stocks, leading to immediate price appreciation.
How to Make a Choice?
With a number of industry players, zeroing in on the right stocks may appear to be a daunting task. This is where our proprietary methodology comes in handy. It's fairly simple – stocks with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP are the ones that are likely to beat earnings estimates this announcement.
Earnings ESP is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here are two iron and steel stocks that are currently equipped with the right combination of elements to post an earnings beat.
Vale S.A. (NYSE:VALE-Free Report)
Rio de Janeiro, Brazil-based Vale is one of the world's largest producers and exporters of iron ore and pellets. It has exposure to the steel sector through its investments in energy and steel businesses. Vale currently has a $74.2 billion market capitalization and carries a Zacks Rank #3 (Hold).
The company has maintained a streak of positive earnings surprises for three straight quarters, averaging 14.9%. The Zacks Consensus Estimate for the fourth quarter is at 64 cents (estimated growth of 73.0% year over year). For fiscal 2013, earnings is expected to climb 7.7% to $2.37. The Earnings ESP is at +17.19%.
Vale saw escalating production of iron ore and pellets in the third quarter. Shipments were also the third highest for a quarter in the company's history. Vale has incessantly focused on cutting its costs to maintain margins. The company is now benefiting from the divestment of its non-profitable and low-margin assets. Vale was recently granted an environmental license for its $20 billion investment in a new iron ore production capacity at its Carajas mining complex in northern Brazil. This will not only be a huge accomplishment for Vale but also go down as the largest project so far in the iron ore industry. It will scale up iron ore production at the company to feed the growing demand in the developing markets.
-Vale is slated to report its fourth quarter results on Feb 27.
Ternium S.A. (NYSE:TX-Free Report)
Ternium manufactures and processes a broad range of value-added steel products for customers active in the construction, automotive, home appliances, capital goods, container, food and energy industries. This leading steel producer in Latin America has a market capitalization of $6 billion with an annual production capacity of approximately 10.8 million tons of finished steel products.
Ternium has delivered a one-year return of 39.25%, outperforming the S&P 500. The Zacks Consensus Estimate for fourth quarter is at 61 cents (projected growth of 147.5% year over year), and for fiscal 2013, at $2.43 (a 242% annual climb). The Earnings ESP is at +3.28%.
Ternium expects a relatively stable operating income in the fourth quarter as compared to the third quarter mainly on the back of a slightly higher operating margin and revenue per ton. Seasonally lower shipments are expected to be a partial offset. Ternium will benefit from its two new facilities in Mexico that are expected to ramp up in the next nine months. In Argentina, its new continuous caster at Siderar is on track to come into operations in the third quarter of 2014. This investment will increase Ternium's annual slab production capacity by approximately half a million tons. Steel intensity in Latin America is relatively low, providing growth opportunities for Ternium.
-Ternium is slated to report its fourth quarter results on Feb 19.
Moving Forward
The iron and steel stocks had buckled under the weight of China and the slowdown of the global economy for the major part of 2013. With China turning the corner and the revival in the global economy, the industry seems to be finally seeing light at the end of the tunnel. A sneak peek at the space for some possible winners backed by a solid Zacks Rank and a positive Zacks Earnings ESP could be a great idea for investors to gain from this earnings season. The stage seems finally to be set for iron and steel stocks to provide better returns to patient investors.
Philips 66 to Divest Assets
Phillips 66 (NYSE:PSX-Free Report) announced that it would divest its products pipeline system and two storage spheres for $700 million to Phillips 66 Partners LP (NYSE:PSXP-Free Report).
The partnership will acquire Phillip 66's Gold Line System – which consists of a 681-mile refined products pipeline that runs from its Borger, Texas refinery to Cahokia, Ill. –and two refinery-grade propylene storage spheres. The transaction is expected to be completed by Mar 1.
Headquartered in Houston, Texas, Phillips 66 Partners is a master limited partnership formed by Phillips 66 in 2013 to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids pipelines and terminals and other transportation and midstream assets.
The strength of Phillips 66's business model reflects its commitment to return value to shareholders along with its strong cash generation capabilities. Phillips 66 has a good capital deployment policy through share repurchase and payment of dividends. We believe that the Berkshire transaction will boost investor confidence in the stock, and drive shareholder value.
Phillips 66, an independent publicly traded company, was formed after the spin-off of the refining/sales business of ConocoPhillips (NYSE:COP-Free Report) in 2012. The move resulted in the creation of the largest refining company in the U.S. and the largest exploration and production player based on oil and gas reserves.
Phillips 66, is headquartered in Houston, Texas. In addition to the refining, marketing and transportation businesses, the company has emerged as an integrated downstream company with most of the Midstream and Chemicals segments as well as power generation and certain technology operations included in the Emerging Businesses segment.
Phillips 66 currently holds a Zacks Rank #2 (Buy).
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