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business newsX Marks the Soft Spot for US Steel
By
Justin Sharon
Jan 19, 2011 4:50 pm
Shares are sliding almost 5% on a plethora of problems including valuation concerns and poor corporate earnings.
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Deutsche Bank this morning downgraded the stock to Hold from Buy at an outfit whose strip mills and sheet metal helped power America’s long postwar boom. Today’s slide takes its 12-month tumble to more than 18%, though the poor performance over the past 52 weeks actually belies a relatively strong showing in the last three months. Accordingly, Deutsche’s downgrade was in large measure due to valuation concerns at the country’s second largest steel company, especially in light of corporate earnings that were less than gangbuster in its most recent quarter (Q3).
Analyst David Martin’s assertion that “We maintain a cautious view on steel due to rising costs (iron ore, met coal, scrap) and our belief that steel prices are nearing a peak” has also sent shares in smaller competitors, including AK Steel (AKS), sharply lower. Martin maintains a more bullish outlook on Nucor Corp. (NUE), the sole Buy-rated name in his coverage universe.
Global growth is improving, benefiting US Steel’s end markets, and it can claim to be much more self sustaining as far as commodity costs are concerned than any domestic competitor. Still, the company isn’t immune to continued increases in raw material costs such as we have seen lately. Much reason then for Monday morning quarterbacking, even if Pittsburgh can still boast Big Ben Roethlisberger. At least until the Jets get to him on Sunday.
Please see Steel Faces Shaky Future as Demand Weakens, Hyman Roth ETFs to Consider for Steel M&A Rumors, and What to Expect From US Steel.
Talk about no Half measures. Bank of America-Merrill Lynch raised their recommendation on shares of specialized staffing outfit Robert Half International Inc. (RHI) an unusual 180 degrees this morning, to Buy from Underperform. Wall Street research skeptics will snicker that’s the very reason why shares are sliding more than 2% as I write, but such a cynical attitude belies the generally good calls made by the same equity analyst on employment services peers Manpower Inc. (MAN), TrueBlue, Inc. (TBI) and, most recently, Resources Connection Inc. (RECN).
Robert Half provides temporary employment solutions, with its Accountemps division always proving particularly popular as tax time approaches. Merrill’s bullishness ahead of fourth-quarter earnings on Wednesday, January 26, stems from several factors at this 63-year-old California company, which also offers IT consulting and clerical services. It predicts that Robert Half, which is more US focused than Manpower, will have the fastest revenue and earnings per share growth in 2011 in its industry, estimated to be 14% and an especially impressive 112 respectively.
The bank points out that “professional staffing typically lags light industrial rebound by 12-18 months” and that “January is the 16th month of the current US temp help expansion.” Its 12-month price objective of $38, which equates to 24 times the 2012 EPS of $1.55, is more aggressive than Barclays, which took its target up to $32 only last week, a level the stock remains above even after this afternoon’s implosion.
Risks? Although President Obama’s administration may now be less prone to red tape if that Wall Street Journal Op-Ed is a reliable indication, any increase in regulation remains a red flag for the industry. Shares are also relatively heavily shorted, and tend to trade in tandem with weekly jobless claims which -- while improving -- are still laboring.
Also check out In a Jobless Recovery, Where Do Recruiters Find Work? and Betting on the Temps.
No wonder everyone’s favorite scary uncle just got out of the pop culture gig. It is after all an awfully lagging indicator. NBC’s (GE) Outsourced recently debuted to mediocre reviews just as Indian off-shoring started to lose some of its political sting. And shortly thereafter, Love And Other Drugs celebrated the go-go era of pharmaceutical sales at the dawn of Viagra, just as the drug giant that launched the product is suffering through a multi-year funk. Even today’s upbeat analyst initiation, allied to a bullish Barron’s article late last year, isn’t enough to aid Pfizer Inc. (PFE) at the moment. Shares in the Dow component are down better than 1% this afternoon, taking it into the red by perilously close to double digits on a percentage basis in the past year.
The Big Apple-based firm founded in 1849 struck accidental gold with its little blue pill, originally intended as a blood pressure panacea. Its other household names include Lipitor for cholesterol and the anti-arthritic Celebrex, along with Lyrica to treat neuropathic pain and Aricept, approved for Alzheimer’s. However, while the demography-is-destiny crowd has been pointing to the baby boomers’ inexorable aging as a key stock price catalyst for a decade, Pfizer has now been dead money long enough that it may be time to call for the men in white coats.
It remains a worldclass outfit commanding economies of scale unmatched in its industry, with Wells citing upcoming cost cuts and selective emerging market expansion as reasons to remain cheerful. However, it’s unlikely cut costs -- or indeed a 4.40% dividend yield -- would have been racy enough to entice the slick salesman portrayed by Jake Gyllenhaal to jump at a job there. Overhangs include managerial musical chairs, Ian Read having been unexpectedly appointed CEO only last month, and looming generic competition with patent expirations upcoming for Lipitor (2011) and its antidepressant Effexor.
Turn to Pfizer Fails… Again, Docs on Pharma Payroll Have Blemished Records, Limited Credentials, and Random Genius: Viagra for more.
Archer Daniels Midland Company (ADM) also made it to the movies not so long ago, and it is admittedly fairing far better. While ethanol may well end up being Uncle Sam’s most shameless subsidized passing fad, with Chicago Merc wheat prices in January currently cornier than Kansas in August and food riots erupting all over the globe, it’s surely no surprise to see this self-styled “supermarket to the world” going great guns. Shares in the agribusiness commodity powerhouse are well off their earlier highs, but remain up on an otherwise down day after analysts at Credit Suisse raised their recommendation to Outperform from Neutral at the Illinois outfit established in 1898. The Zurich-based bank also boosted its price target by $3 to $40 on what it sees as an upcoming expansion in gross margins and volume growth, with higher grain prices increasingly looking like they’re here to stay.
Supply interruptions and a rise in core commodity costs including soy beans and cocoa remain headline risks, but ADM should continue to benefit from a secular “feed the world” investing trend.
Read related content at Ever Increasing Corn Prices Are a Real Killer, US Government Still Deluding Itself About Corn Ethanol, and Welfare-Case Companies: ADM and Big Agriculture.
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No positions in stocks mentioned.
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