Steel stocks: Strong potential for turnarounds

"The steel stocks tend to go through boom and bust cycles depending on global economic activity; they have been pummeled over the last year, as the global economy slowed," notes turnaround expert George Putnam.

In his The Turnaround Letter, he explains, "But the news about steel is not all bad." Here, he offers an overview of six steel makers that could be poised for a turnaround.

"Weakness in two big steel consuming industries, autos and construction, has been particularly troublesome for the steelmakers.

"However, there is evidence that steel inventories are gradually being worked off to low levels. There are also signs that economic activity in China, which is a huge consumer of steel, will not fall off as far as some economists initially feared.

"Moreover, several steel producers took advantage of the last boom cycle to modernize their facilities and improve their balance sheets.

"Could the steel stocks go lower if the global recession is prolonged? Sure. But, on the other hand, it wouldn’t take much of an economic rebound to push them much higher from their current levels.

"AK Steel Holding (NYSE: AKS) was in dire straits in 2003, but management reshaped operations and shored up the balance sheet.

"Though revenues have taken a sizeable hit and operations swung to a loss in the latest quarter, cash flow has remained positive.

"Arcelor Mittal (NYSE: MT) is one of the world’s largest steel producers with roughly 8% of world output. Acquisitions that fueled growth also grew the firm’s debt load. But it has been able to pare down debt and extend maturities.

"Nucor (NYSE: NUE) is one of America’s largest steelmakers/recyclers with a reputation for a strong management team and a conservative financial structure.

"Although it has struggled recently along with the rest of the industry, Nucor will be a survivor, almost regardless of how long the downturn lasts.

"Schnitzer Steel Industries (NASDAQ: SCHN), founded in 1906, has operations in recycling scrap metal, used and recycled auto parts and finished steel products.

"All three sectors are under pressure, as evidenced by a 42% slide in revenues for the second quarter ended Feb 28. However, strong cost controls and minimal debt allowed the company to still generate positive cash flow. Schnitzer also has some takeover appeal.

"U.S. Steel (NYSE: X) has over a long period of time encountered and survived many formidable headwinds, and, we suspect they’ll survive once again.

"In response to very weak market fundamentals, management is taking a number of actions ranging from pay, dividend and capital-spending reductions to raising additional funds via equity and debt offerings.

"Worthington Industries (NYSE: WOR) is a steel processor; that is, it buys coils of sheet steel that it then turns into a variety of industrial products.

"Management has initiated aggressive restructuring measures that should generate significant annual savings. A solid balance sheet and good cash flow bode well for Worthington’s long-term future."