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Steel stocks are likely to put up an impressive show this earnings season, helped by robust demand in major end markets and a strong run-up in steel prices. The steel industry saw a solid first quarter with steel prices zooming to record highs on the back of a surge in demand and tight supply.    

Coronavirus-induced demand destruction wreaked havoc on the steel industry for much of the first half of last year. However, strong pent-up demand from major steel-consuming industries such as automotive and construction, and skyrocketing steel prices have pulled the industry out of its funk.

Recovery started to gain steam toward the end of the third quarter of 2020 on resumption of operations across major steel end-use markets following an easing of lockdowns and restrictions across the word. Steel prices are also shooting higher on an upturn in demand. With domestic steel prices hitting fresh highs, U.S. steel stocks are flying high after getting clobbered along with most other commodities last year as the pandemic shattered demand.

Steelmakers are seeing strong order booking in automotive. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. The automotive rebound is driving demand for flat steel products globally.

Moreover, the revival in the construction sector globally is spurring demand for long and flat steel products in this major market. Steelmakers are benefiting from a resilient non-residential construction market.

Meanwhile, U.S. steel prices witnessed a significant upswing during the March quarter driven by an upturn in demand, supply shortages, and higher steel input costs. Notably, U.S. steel prices plummeted at a breakneck pace last year as coronavirus gutted demand. The benchmark hot-rolled coil (“HRC”) prices plunged to a pandemic-induced multi-year low of roughly $440 per short ton in August 2020.

However, HRC prices have witnessed an impressive recovery since then and zoomed to levels not seen since 2008 on solid demand, especially in automotive and construction, and supply constraints. Notably, HRC prices shot past the $1,300 per short ton level last month. Prices have rallied more than 200% from the August 2020 low. The demand-supply imbalance is the main reason behind the surge in steel prices. Production disruptions associated with mill outages, lower steel imports due to Section 232 tariffs and the pandemic have squeezed steel supplies. The rally in steel prices is expected to have driven profitability and cash flows of steel companies in the first quarter.

Per the Zacks Industry classification, the steel industry falls under the broader Basic Materials sector. Basic Materials is among the sectors that are expected to deliver positive earnings growth in the first quarter. Overall earnings for the sector are projected to rise 63.5% on 10.4% higher revenues, per the latest Earnings Outlook. The projections reflect an improvement from a 28.1% rise in earnings on a 1.6% increase in revenues that was witnessed in the fourth quarter.

Solid Zacks Industry Rank

The Zacks Steel Producers industry currently carries a Zacks Industry Rank #3, which places it in the top 1% of more than 250 Zacks industries. The favorable rank reflects the industry’s strength. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Price Performance

The Zacks Steel Producers industry outperformed the broader market in the March quarter. The industry gained 29.6% in the quarter, higher than the S&P 500’s corresponding return of 6.1%.

5 Stocks to Scoop Up

The steel industry is expected to have a solid first-quarter earnings season on-demand and pricing strength. As such, a sneak peek at the space for some potential winners backed by a solid Zacks Rank could be a great idea for investors looking to gain from the first-quarter earnings season.

Below we discuss five steel stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are worth investing in ahead of their first-quarter earnings.

Nucor Corporation (NUE Quick Quote NUE - Free Report): Charlotte, NC-based Nucor, sporting a Zacks Rank #1, is benefiting from the strength in the non-residential construction market and a strong recovery in automotive. It also remains committed to boosting production capacity, which should drive profitable growth and strengthen its position as a low-cost producer. The company should also gain from considerable market opportunities from its strategic investments in its most significant growth projects.

Nucor has expected earnings growth of 212.1% for the first quarter. Moreover, the Zacks Consensus Estimate for the quarter has been revised 5.1% upward over the last 30 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 46.7%. The stock also shot up 51% in the first quarter. Nucor is scheduled to reported first-quarter earnings on Apr 22.

Ternium S.A. (TX Quick Quote TX - Free Report): The Luxembourg-based company, carrying a Zacks Rank #1, is benefiting from a recovery in shipments and higher realized steel prices. Ternium is also gaining from the cost competitiveness of its facilities. The company is also taking actions to boost liquidity and strengthen its financial position in the wake of the pandemic.

Ternium has expected earnings growth of 154.4% for the first quarter. The consensus estimate for the first quarter has also been revised 11.2% upward over the last 30 days. The company also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 197.8%. The company’s shares also popped roughly 34% in the first quarter. It is slated to reported first-quarter earnings on Apr 27.

ArcelorMittal (MT Quick Quote MT - Free Report): Luxembourg-based ArcelorMittal, a Zacks Rank #1 stock, is seeing a rebound in demand, especially in automotive, following the easing of lockdown measures. Moreover, the company is expanding its steel-making capacity and remains focused on shifting to high-added-value products. Its cost-reduction initiatives and higher steel selling prices will also drive profitability.

ArcelorMittal has expected earnings growth of 361.7% for the first quarter. It also surpassed the Zacks Consensus Estimate in three of the trailing four quarters. Moreover, the company’s shares gained roughly 27% in the first quarter. It is scheduled to reported first-quarter earnings on May 6.

Olympic Steel, Inc. (ZEUS Quick Quote ZEUS - Free Report): Ohio-based Olympic Steel, carrying a Zacks Rank #1, is gaining from its strong liquidity position, actions to lower operating expenses, and strength in its pipe and tube and specialty metals businesses. Moreover, improving industrial market conditions and a rebound in demand are expected to support its volumes.

The company has expected earnings growth of a whopping 6,400% for the first quarter. The Zacks Consensus Estimate for the first quarter has been revised 9.2% upward over the last 30 days. The stock has also surged roughly 121% in the first quarter. The company is slated to reported first-quarter earnings on May 7.

Steel Dynamics, Inc. (STLD Quick Quote STLD - Free Report): Based in Indiana, Steel Dynamics carries a Zacks Rank #2. It is benefiting from momentum across the automotive and construction sectors. Higher flat roll steel prices aided by strong demand are also expected to drive the profitability of its steel operations.

The company has expected earnings growth of 125% for the first quarter. It has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 9.6%. Moreover, its shares rallied roughly 38% in the first quarter. Steel Dynamics is slated to reported first-quarter earnings on Apr 19.