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Nucor (NYSE:NUE) +0.8% and Cleveland-Cliffs (CLF) -0.8% in Wednesday's trading after Citi upgrades the former and downgrades the latter, as the bank updates its steel models ahead of expected guidance updates from Nucor and Steel Dynamics this week.
Citi analyst Alexander Hacking flips his ratings on the stocks, boosting Nucor (NUE) to Buy from Hold with a $240 price target, raised from $180, while cutting Cleveland-Cliffs (CLF) to Hold from Buy but maintaining his $22 PT.
Hacking thinks Nucor (NUE) is underrated relative to its mid-cycle return on invested capital of 15%-20%, which should justify 30%-40% higher multiples and potentially 10x-12x EBITDA vs. historical 6x-8x, supported by a track record of more than 20 years of EPS growth and positive free cash flow generation.
On the other hand, Hacking says higher costs have led to EBITDA at Cleveland-Cliffs (CLF) that has "underwhelmed relative to the strength of underlying steel markets," with a view to mid-cycle EBITDA of ~$2B and implied free cash flow of 7%, which is "fair but not compelling."
The analyst also raises his price target on Steel Dynamics (STLD) to $160 from $130 and says he remains a mid-term steel bull while noting that the slowing U.S. economy is a key risk, as steel stocks would not outperform in a recession.