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Goldman Sachs analyst Emily Chieng downgraded shares of Steel Dynamics (NASDAQ:STLD) to Neutral from Buy on valuation.
The steel sector is down nearly 30% off the highs, however, Chieng sees potential for steel stocks “to reflect near-term demand headwinds as we saw during the last two cycles.” The price target goes to $92.00 per share from $114.00.
Along these lines, Steel Dynamics is cut to Neutral following the period of relative outperformance. STLD shares are up 72% versus the S&P 500 +1%. The move also reflects “modest caution around non-residential construction demand outlook.”
“While we remain constructive on the fundamentals of the business, we see this better reflected in current valuation with the stock having outperformed since initiation. In our view, the outperformance can be attributed to balance sheet strength, near-term production and normalized free cash flow growth following the start up of the Sinton mill, and importantly, additional capital returns announced earlier this year,” Chieng said in a client note.
Elsewhere, the analyst remains Buy-rated on Reliance Steel & Aluminum (NYSE:RS). On the other hand, Chieng also maintained a Sell rating on US Steel (NYSE:X).
“Longer term, our view on the steel equities remains broadly positive, underpinned by (1) supply-side consolidation, (2) stronger balance sheets, (3) a focus on capital returns, and (4) potential for infrastructure spending driven demand support. Over time, we see opportunities for companies to differentiate themselves via decarbonization, raw material integration, while balancing capital returns and further margin expansion growth,” the analyst concluded.
Steel Dynamics shares are down 3% in pre-open Tuesday.
