Opinions
The Panic-Proof Portfolio (Stockchase Research)
Algoma Steel Group Inc
ASTL-T
TOP PICK
Nov 22, 2022
Stock price when the opinion was issued
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Our PAST TOP PICK with ASTL has triggered its stop at $9.50. To remain disciplined, we recommend covering the position at this time. This will result in a net investment loss of 2%, when combined with the previous buy recommendation.
ASTL is one of Canada's largest steel producers. It trades at 6x earnings, under book value and supports a 19% ROE. Previously reported earnings indicated cost over runs and project delays that we feel have been fully discounted into the price. Meanwhile plate mill modernization is moving ahead of schedule. Its dividend is backed by a payout ratio under 20% of cash flow. We recommend a stop-loss at $8.50, looking to achieve $12.50 -- upside potential over 21%. Yield 2.6%
(Analysts’ price target is $12.75)EPS of $0.24 missed estimates of $0.3067 and revenues of $732.6M beat expectations of $692.38M. Revenue of $732.6M, increased from $599.2M, and income from operations rose substantially. Its Adjusted EBITDA margin shrunk from 13.8% in the prior year to 11.1% in the recent quarter. Its results were negatively impacted by declines in steel prices due to labor stoppages at auto manufacturers in the US. Management expects a recovery in steel demand and pricing, however. Its balance sheet expanded, and its free cash flow grew. This was an OK quarter, and share prices are largely unchanged. It trades at a decent valuation of 0.4X forward sales and 7.1X forward earnings and pays a dividend of 2.7%. It may hover around these prices until a recovery in steel demand and pricing returns.
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Our PAST TOP PICK with ASTL has triggered its stop at $10. To remain disciplined, we recommend covering the position at this time. We combined with our past recommendations, this will result in a net investment gain of 12%
ALC is kind of a 'sleeper' stock, offering not much excitement but a low valuation and decent dividend. There is little growth, though, and 2025 estimated earnings will be below the level of 2021. It also has a fairly levered balance sheet. We have always thought it would make a good privatization candidate, but that is not enough reason to give it a strong endorsement. We would not miss it if sold.
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