Steel stocks have been making new highs in recent weeks. We recently covered the industry as well as an exchange-traded fund (ETF). Today, we extend that discussion to FTSE 100 member EVRAZ (LON:EVRE) (OTC:EVRZF).
In the past year, EVRE shares have returned more than 158% and year-to-date, the stock is up about 44%. On May 20, the stock closed at 668p (or $9.42 for US-based shares).
The current share price supports a dividend yield of 7.4%, a rate far above the long-term average for dividend yields around 4.5% for other FTSE 100 members. Therefore, dividend investors have been piling on EVRE shares. The stock will go ex-dividend on May 25, with the next dividend payment expected June 25. Evraz's current market capitalization is £9.8 billion (US$13.9 billion).
By comparison, in the past 12 months, the Dow Jones Iron & Steel index has returned 124%. Year to date, it is up 68% and saw a multi-year high in recent days. As most of the iron ore extracted is used in steel production, iron ore prices are an important part of the equation as well.
According to the World Steel Association, the global demand for steel will go up by more than 4% in 2021. China is both the largest producer and consumer of steel. This booming demand for iron and steel has provided tailwinds for steel stocks worldwide.
Given the recent increase in price of EVRE shares, investors now wonder whether there could be more gains in the months ahead. Let’s take a look.
Recent Earnings
Evraz is a steel, mining and vanadium business, with operations in Russia, Kazakhstan, the US, Canada and the Czech Republic. Its competitive advantage lies in the fact that it is involved in every step of the steel production process. It owns iron ore mines as well as steel foundries. Some readers might also know that Russian businessman Roman Abramovich is the biggest shareholder of the company.
In late February, Evraz released full-year results. The group's consolidated revenues for the year ended Dec. 31, 2020, totalled $9.75 billion, down 18.1% year-on-year. Last year, it had been $11.9 billion. Net profit of $858 million translated into basic EPS of 58 cents. A year ago, the comparable metrics had been $365 million and 23 cents per share.
CEO Alexander Frolov said:
“The Group delivered solid operating and financial results with EBITDA reaching US$2,212 million and EBITDA margin reached 22.7% in 2020.”
On Apr. 29, Evraz released a trading update for Q1, which showed production weakness and supply-chain issues for the quarter. However, despite the cautious update from management, EVRE shares have moved up about another 10% in May, thanks, in part, to increase in steel prices.
Various exchanges worldwide offer different steel futures. For example, the US Midwest Domestic Hot-Rolled Coil Steel Futures futures on the CME are up more than 215% in the past 12 months.
Bottom Line
Commodity prices have been steadily going up in the past year. Analysts are debating whether a commodity supercycle, which can last for many years, is here. Rising expectations of inflation have been among the main catalysts.
Yet, asset prices such as steel can also fall just as fast as they rise. When that happens, high profits of steel businesses, including Evraz, don’t last long. Put another way, stocks can get ‘marked down’ for a variety of reasons.
As with other investments, due diligence on EVRE stock would be necessary. A potential decline toward the 630p level would improve the margin of safety for long-term investors. Following such a pull-back, the bullish momentum of recent months could easily continue for the rest of the year, too. Meanwhile, long-term shareholders would be entitled to the juicy dividend.
Finally, those investors who do not to want to commit capital to a single company like Evraz could consider buying an ETF that would give access to steel shares. Examples include the VanEck Vectors Steel ETF (NYSE:SLX) and the SPDR® S&P Metals and Mining ETF (NYSE:XME).