X marked the spot for investors on Monday. Shares of U.S. Steel (NYSE:X) surged more than 25% on the news that Japan’s Nippon Steel had agreed to buy the iconic Pittsburgh-based steel company for $14.9 billion.
But what does the deal mean for other steel companies?
Wall Street is betting on more upside for the industry. Shares of Steel Dynamics (NASDAQ:STLD) were up slightly while Nucor (NYSE:NUE) gained nearly 2%. Luxembourg-based ArcelorMittal (NYSE:MT) was up more than 6% as well.
And then there’s Cleveland-Cliffs (NYSE:CLF), which already owns AK Steel. Shares surged more than 10% Monday. Why? Investors seem pleased to see that CLF won’t be adding to its debt load to get in a bidding war for U.S. Steel. Cleveland-Cliffs announced an unsolicited takeover for U.S. Steel in August. U.S. Steel rejected it.
But Cleveland-Cliffs’ outspoken CEO Lourenco Goncalves, who once told an analyst on a conference call that they were “an embarrassment to [their] parents,” said in a statement Monday morning that CLF wasn’t going to increase its debt load to get in a bidding war for U.S. Steel. Instead, Goncalves said CLF will instead focus on “more aggressive share buybacks” to try and boost the stock price.
U.S. Steel Deal Sends Steel Stocks Higher
Still, the U.S. Steel purchase, if it passes antitrust regulatory reviews and holds up against union concerns, helps validate the steel industry. Steel companies have been rallying since Cleveland-Cliffs first proposed its purchase of U.S. Steel over the summer. Goncalves pounded the table for steel companies again on Monday, saying that even though U.S. Steel “chose to go a different direction with a foreign buyer,” the deal “validates our view that our sector remains undervalued by the broader market.”
Steel stocks have gotten a further boost in recent weeks following the end of the United Auto Workers strike. Worries about the UAW worker walkout had investors nervous about demand for steel, a key material used to make cars and trucks. But the price of hot-rolled coil steel has surged nearly 40% since the UAW reached deals with each of Detroit’s Big 3 automakers in late October to end the strike. That should boost earnings for the major steel companies as Ford (NYSE:F), General Motors (NYSE:GM) and Stellantis (NYSE:STLA) start to buy more steel to get production lines going again.
The consensus earnings estimate for U.S. Steel’s first quarter earnings per share has gone up from 29 cents three months ago to a current forecast of 67 cents. Profit forecasts are going up for Cleveland-Cliffs, Nucor, and Steel Dynamics, too. Despite this, steel stocks continue to trade at dirt-cheap valuations, with CLF, NUE and STLD all priced in a range of just 11 to 14 times 2024 earnings estimates. ArcelorMittal is even more of a bargain, sporting a P/E of only 7 times 2024 profit projections.
Brace for Gains in NUE, STLD, CLF and MT
Whether or not the Nippon-U.S. Steel deal heralds in a new round of consolidation in the industry remains to be seen. But the merger, combined with some better fundamentals, could light a fire under other steel stocks heading into the new year.
Cleveland-Cliffs is particularly poised to benefit from its share buyback plans. And Nucor, Steel Dynamics and ArcelorMittal all look like attractively valued stocks that are good buys at these levels thanks to rising earnings expectations as the global economy continues to hum along.
As of this writing, Paul R. La Monica did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
