Rebasing estimates to reflect lower growth; Buy FCX and AA
Market pricing in very weak demand; prefer metals over steel In line with recent weak economic data and macro concerns, with leading indicators like ISM and ABI pointing to renewed weakness, we are cutting our estimates and target multiples, resulting in an average -24% in our PTs across our coverage. We remain more positive on emerging markets, which have a higher influence on metal demand versus developed economies. We thus prefer metals and mining stocks over steel stocks in the near term. Within carbon steel, we prefer service center stocks over steel mill stocks.
Metals & Mining: Correction creates opportunity; Buy FCX and AA We believe the recent pullback in metals & mining stocks has created a particularly attractive entry point for select names. We remain very bullish on copper fundamentals and recommend investors continue to buy FCX. Although we are not as bullish on aluminum as copper, we prefer AA as we see the delinking of alumina-aluminum prices and AA’s aerospace exposure as strong earnings drivers over coming years. We are upgrading CENX to Neutral was Sell as the stock now appears fairly valued. We are also lowering our aluminum price forecast and estimates for AA, CENX and NOR. We are also lowering our PT multiples across our covered stocks to reflect the higher risk premium the market is applying, thus lowering PTs on average 21%.
Steel: Correction appears overdone but fundamentals remain weak. Despite the underperformance of steel stocks during this recent downturn, we are reluctant to get more constructive and expect supply-demand fundamentals to remain challenged in the near future. Although a seasonal uptick in demand in the autumn period, expected lower imports in coming months, and a negative arbitrage between US and global prices may provide some support in the near term, we question the sustainability of price increases going into the latter part of the year. We prefer service center stocks over mill stocks and are upgrading RS to Buy, was Neutral. We are downgrading WOR to Sell from Neutral as the stock appears overvalued, and we see 14% downside vs steel sector upside of 6%. We are also downgrading STLD to Neutral from Buy as we prefer RS. Among the mill stocks, we prefer NUE (Neutral), and on the upstream we prefer SCHN (Neutral). Among specialty metal stocks, ATI (Buy) is our preferred name as we remain very bullish on the aerospace cycle. We are also lowering our PTs by 26% for our covered stocks as we lower our estimates (on revised demand, pricing and costs assumptions) and PT multiples (to reflect higher risk premium)
Wednesday, August 31, 2011
Goldman Sachs sez; buy Freeport (FCX) and Alcoa (AA)
Here's the front page of the GS note out this morning.