3 Gems in the Metals & Mining Space: United States Steel Corporation (X), Peabody Energy Corporation (BTU) and More

The metals and mining industry within the basic materials sector has been receiving some favorable comments from the start of the year given some improvement in the macro-environment dynamics. This has led to some capital appreciation of players within this space.  However, I still believe that there are some players out there that haven’t realized fully from the ongoing improvement sector-related dynamics. Here are some of them:

Reliance Steel & Aluminum (NYSE:RS)

The stock is levered to the US recovery without direct global exposure. The company gets 95% of its revenues from the US. The company has the following characteristics that make it an attractive option among the steel players:

1)      Industry-leading size & scale,

2)      Diversified end market mix/product mix,

3)      Strong margin sustainability,

4)      Stellar track record of acquisitive growth,

5)      Adequate liquidity reserves – $800 million in revolver availability.

I have already covered this company in one of my older posts. There I mentioned that the company has one of the best product mixes to benefit from steel demand recovery in the US. It deals in carbon steel, aluminum and stainless steel. Moreover, the company is not expected to face any major raw material cost headwinds. Additionally, I believe that if/when we do get a recovery in non-residential construction, normalized EPS could be $7/share to $8/share, which implies an $84 to $96 share price based on its historical P/E multiple of 12.

United States Steel Corporation (NYSE:X)

There are a number of compelling industry and company specific data points that suggest that 4Q will prove the earnings trough, with an expected steel price recovery pushing the shares higher over the next three months given that:

1) The company is highly levered to steel prices, autos in particular, which are expected to continue to improve in the coming months. The company gets 30% of its revenues from the auto sector.

2) A reversal in rig counts is expected, which sets the stage for a potential OCTG demand recovery in 2H’13. The Oil Country Tubular Goods are pipe and tube products used in the petroleum industry. The sell-side claims that the rig count will see the bottom by the end of the first half of this year.

3) Seasonality remains supportive.

Peabody Energy Corporation (NYSE:BTU)

Peabody remains the top pick in the coal sector, given its: