Monday, October 08, 2007

US Steel (NYSE:X): Morgan Stanley's top Short Idea

- Morgan Stanley is initiating coverage of the North American steel industry with a Cautious view. According to them, steel stocks do not appear to be discounting the one-two punch of a deteriorating supply-demand balance and slowing global growth that we expect next year. Firm's top short idea is US Steel (NYSE:X, Underweight). Its profits are at relatively greater risk in their base case pricing scenario, given its high fixed costs and exposure to the commodity tubular market. MSCO's long pick is Nucor (Overweight), a better defensive play as industry growth begins to wane, though they do not recommend purchase. Firm rates AK Steel (NYSE:AKS) Equal-weight. If the US slips in to a recession (bear case scenario, which they currently assign a 30% probability), they think the stocks can retrace much of the gains they have posted in recent years.

A prolonged period of high global steel prices is fueling heavy investment, and capacity additions are now coming online at breakneck speed. As global GDP is expected to downshift in 2008, global steel demand growth appears set to slow and is unlikely to keep pace with global supply.

Notablecalls: MSCO has been out with cautious calls on several sectors lately. And rightly so. Now is the time to be cautious, not when things are down another 20% from here. I very much like MSCO's Steel call here and I think both X and AKS will get hit in the n-t. I would not be surprised to see X slide below the $100 level soon.


notablecalls said...

AKS is trading up today due the VEBA settlement announced this morning.

Stella's Dream said...

Thanks for the're right caution is the word of the day (if not the month)

AJ said...

Dont go short 'X' just yet unless someone here can confirm that 'x' doesn't ship any steel outside the states..