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Citi downgraded Steel Dynamics (NASDAQ:STLD) to a Neutral rating (from Buy) and raised the target price on the stock to $130.00 (from $110.00) ahead of the company’s 4Q earnings release.
Citi remains positive on the long-term outlook for Steel Dynamics. However, the stock has significantly outperformed peers, and closed up the historical EV/EBITDA gap with Nucor Corp (NYSE:NUE). NUE and STLD are trading at 7-8x normalized EBITDA on Citi’s estimates, in line with historical, suggesting that the market is somewhat aligned with Citi’s view.
In the long-term, Citi believes that this is the “best steel market in a generation.” Analysts wrote in a note, “We see a potential 5–10 year window of super-profits for the U.S. steel sector driven by a combination of supply-side issues (tariffs, consolidation, greater discipline & ESG) and potential demand-side drivers (infrastructure & reshoring). Decarbonization appears an opportunity, more so than a risk, given that the U.S. industry is likely the cleanest in the world (already ~70% EAF).”
In the short term, Citi sees headwinds, as the sheet markets appear inflated by temporary re-stocking demand and prices well above import parity. The analysts continued in the note, saying, “We don’t expect an imminent correct with lead-times still expanding but caution is warranted. We acknowledge that we missed the strength of this restock as inventory data showed normal levels & we should have paid more attention to the ~4mt lower shipments to service centers in 2022 vs 2021. Construction steel demand may also face an air-pocket driven by Fed hikes and slowing e-commerce demand.”
Shares of STLD are down 7.68% near mid-day trading on Wednesday.
