(By Balaseshan) Deutsche Bank analyst David Martin initiated coverage of Metals USA Holdings Corp. (NYSE:MUSA) with a "Buy" rating and $21 price target.
Martin said steel equities have seen ongoing weakness, declining 22% year-to-date and underperforming the S&P by 33%, and MUSA has out-performed year-to-date both in his steel universe and the S&P (46% and 12% respectively).
However, MUSA shares have declined about 13% since Apollo (its largest shareholder) sold a about 10% stake in early August. The analyst views this as a buying opportunity given this recent share price weakness and the company's market position. MUSA trades at 5 times 2013 EBITDA, inline with his steel coverage but at a discount to SC peers.
U.S. Hot-Rolled Coil (HRC) Steel prices have improved about 11% from a trough in July as a result of higher scrap costs and supply issues in the U.S. Further, the analyst sees current U.S. production rates as supportive and as a result have modestly raised his 2012 U.S. HRC forecast.
With this said however, pressures persist as mill lead times have contracted, trade reports note that domestic steel prices have eased in recent days, and input costs appear set to fall heading into 2013, the analyst noted. He said MUSA is well positioned small-cap company with growth and deleveraging potential.
Martin said his EPS estimates are $1.74 in 2012 and $2.30 in 2013, higher than consensus estimates of $1.71 and $2.11 respectively. Key drivers include volume growth of 12% and 5% and EBITDA margins of 7.9% and 8.7% in 2012-13, respectively. Also, his EBITDA forecasts are $159 million for 2012 and $190 million for 2013 (versus $159 million in 2011).
MUSA is trading up 4.01% at $14.79 on Friday.