BMO Sees Limited Near-Term Upside For Steel Dynamics

While Steel Dynamics, Inc. STLD has good long-term prospects, there are limited company-specific catalysts that could lend meaningful upside to shares in the near term, according to BMO Capital Markets.

The Analyst

BMO’s David Gagliano downgraded Steel Dynamics from Outperform to Market Perform while lowering the price target from $40 to $30.

The Thesis

Steel Dynamics’ long-term growth prospects seem underappreciated, especially after the company announced plans to construct a greenfield flat-rolled mill in Texas, Gagliano said in the downgrade note.

He added, however, that between 2019 and 2022, Steel Dynamics has higher exposure to near-term spot steel pricing volatility.

The analyst cited two reasons for this. First, the company’s free cash flow buffer is currently lower than it has been historically, given the planned increase in capital expenditure during 2020-2022. And second, Steel Dynamics has much higher-than-peers near-term EBITDA sensitivity to changes in underlying spot sheet prices.

Although Steel Dynamics could generate healthy volume growth in the longer term, there is more downside risk than upside potential to underlying spot prices till the end of 2019, Gagliano said.

Price Action

Shares of Steel Dynamics had declined more than 1.46% to $27.65 at the time of publishing.

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