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4 zesty foreign steel stocks to consider
Yes, the domestic steel business is great, but the global steel business is doing well, too. Here are four international steelmakers that will add some pop -- and diversification -- to your holdings.
By Robert Walberg
Though the steel industry has succumbed to some light profit taking over the past few sessions, the fundamental backdrop for the group remains solid. Increased demand due to a strengthening world economy, higher prices, a soft dollar, lean operations and dynamic earnings growth were among the factors cited in last weeks Street Patrol column to explain the domestic steel industrys incredible resurgence over the past year.
With the exception of a weak domestic currency, the international steel companies have enjoyed the same benefits of firm pricing, increased demand and exploding earnings growth. Not surprisingly, these stocks are also up big over the past year -- and, in some cases, a lot more. The average gain of the nine steel companies listed below is an eye-catching 118%.
Considering the steel industrys general lack of sex appeal, many of the domestic companies highlighted here last week were probably foreign to most of you. Consequently, these international firms will sound even farther afield. Heck, before this past week, I hadnt heard of most of them, and Ive been in this business for closing on 20 years.
So why even bother with international companies?
Diversification is a good thing
One good reason is diversification. That became a four-letter word back in the glory days of the late 1990s when investors poured money into a small universe of fast-growing tech companies. However, we all saw what came of that strategy a few years later. Traditionally, diversifying by asset type, industry group and/or geography limit a portfolios downside risk.
The globalization of the economy is another reason to consider international stocks, as many of these companies will have strong footholds in areas of the world experiencing rapid economic growth. Consider Posco (PKX, news, msgs). Not only does this steel maker have a strong presence in its home market of Korea, but nearly 80% of its exports go to Asia, with nearly half of that total going to fast-growing China.
There are downsides to investing in international companies, to be sure. A relative lack of information, different accounting rules and country/currency risks (remember the peso devaluation debacle of the early 1990s) are just some of the pitfalls. However, some of these concerns can be avoided by investing in larger companies with at least a modest following on Wall Street. In doing so, you will at least get some guidance on sales, earnings and margins.
So lets take a closer, regional look at the international steel group to see which companies, if any, might offer some balance to the four domestic stocks favored on this page last week. (My domestic picks, by the way, were Gibraltar Steel (ROCK, news, msgs), Schnitzer Steel Industries (SCHN, news, msgs), Steel Dynamics (STLD, news, msgs) and Worthington Industries (WOR, news, msgs).)
The best of Asia
The easiest place to start is Asia, where Posco is my lone wolf. Bolstered by higher prices, improved margins and strong regional, as well as global, demand, it has delivered sensational earnings growth over the past couple of quarters. For the year, the Street expects the company to grow earnings by 64% to $7.64 per share. With an eye toward a slowing Chinese economy, analysts see earnings tapering off to $6.70 in fiscal year 2005. Nevertheless, at current prices Posco trades at a mere 4.7 and 5.3 times estimated 2004 and 2005 earnings. Thats a pretty steep discount to the companys projected long-term growth rate of 10%. Posco also sports an attractive price/book multiple of 1.05x, little debt and a healthy dividend yield of 1.2%. Given its solid financials, discounted valuations and exposure to some of the worlds fastest growing economies, this ones a keeper.
In the European theater we have Corus Group PLC (CGA, news, msgs) and Ispat International N.V. (IST, news, msgs). While both stocks have enjoyed triple-digit gains over the past 52-weeks, the outlook is less than exciting. Ispat, which is involved more in the processing end of the business, is expected to grow earnings by over 400% in fiscal year 2004. No doubt a sensational performance, but also one that cant -- and wont -- be repeated. In fact, earnings are expected to decline modestly in 2005 to $2.40 per share. The resulting valuation might not be outrageous, but theres good reason for that. Operating margins are relatively low, while the companys debt burden is relatively high.
As for Corus, the first problem is that the company has no following on Wall Street. Consequently, obtaining fundamental information is cumbersome for most investors. Secondly, the companys historically high operating costs and its negative return on equity suggest that there are better options available to investors. Thats not to say that Corus wont continue to deliver improved earnings over the next quarter or two. Its just that with the stock up more than 100% in the past year and a history of inconsistent performance, the potential for additional gains isnt great.
The best action is Latin
Finally, we turn to the Latin American region where we have three Brazilian companies, Companhia Vale do Rio Doce (RIO, news, msgs), Companhia Siderurgica Nacional (SID, news, msgs) and Gerdau S.A. (GGB, news, msgs); two Mexican firms, Grupo IMSA S.A. de C.V. (IMY, news, msgs) and Grupo Simec S.A. de C.V. (SIM, news, msgs); and one outfit from Argentina, Tenaris S.A. (TS, news, msgs).
Given its price under $5 and its lack of coverage by Wall Street, we will quickly dismiss Grupo Simec. A relatively high debt burden, a lofty price/book ratio and deteriorating price momentum are three strikes against Companhia Siderurgica, so its out as well. Finally, as an integrated steel producer with limited bottom-line growth prospects and relatively high operating costs, lets eliminate Gerdau.
That leaves us with three decent investment alternatives from the region: Companhia Vale de Rio, Grupo IMSA and Tenaris. What all three of these companies have in common is that earnings are projected to grow in 2004 and again in 2005. Not surprisingly, they also sport some of the best margins and returns on equity in the group. Additionally, the stocks offer robust dividend yields of 2.4%, 2.0% and 3.2%, respectively. Tenaris is especially interesting in that it manufactures and supplies seamless steel-pipe products and associated services to the oil and gas industry, thus giving it exposure to two rapidly growing segments of the economy. The other two companies are involved in more traditional areas of the steel business.
Investors looking to add a little iron to their portfolios diet should consider putting one or two foreign stocks into the mix to add an international flavor -- and increase exposure to some of the fastest growing regions of the world economy.
Postscript on housing stocks
As a follow-up to my June 17 article dated 6/17/04 entitled It's time to sell your home-builder stocks, note that the Commerce Departments June housing starts and building permits data were downright awful. This followed a drop in Housing Starts for May as well. The stocks in the group responded by falling sharply on Tuesday, with Centex (CTX, news, msgs), Dominion Home (DHOM, news, msgs), Lennar Corp (LEN, news, msgs) and The Ryland Group (RYL, news, msgs) taking out critical supports at their May lows. Investors should expect additional declines in the weeks and months to come.
At the time of publication, Robert Walberg owned none of the securities mentioned in this article.
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