HEARD IN MADRID Acerinox Finds Strength in Steel Price Forecasts

By Robert S Duncan

13 August 1997

The Wall Street Journal Europe

Investors might be reluctant to put money into a stock that had climbed about 48% since the end of last year, but analysts still have "buy" ratings on shares of Acerinox SA.

The Spanish company, one of Europe's largest makers of stainless steel, exports 85% of production and holds 5% of the world market. Forecasts for rising steel prices and, to a lesser extent, a robust dollar have many analysts arguing that Acerinox is well on the way to erasing the memory of disappointing 1996 results recorded by the steel sector as a whole.

Acerinox stock already has benefited considerably from that rosy outlook this year: Its rise so far in 1997 outpaces the more than 32% overall gain in the Madrid market. Acerinox shares closed Tuesday at 27,700 pesetas ($176).

Nevertheless, some onlookers say the stock is still undervalued. For example, Augustin de Valle, analyst at brokerage firm Beta Capital in Madrid, has a "buy" recommendation on Acerinox shares and sees them fairly valued at 37,500 pesetas, implying that a doubling of the 1996 year-end price is in order.

The analyst did concede that the shares could fall slightly in the short to medium term on concerns that steel prices might slip. He noted that steel prices typically weaken in the summer due to overproduction and stockpiling. However, he sees stainless-steel prices maintaining a range of between 2.40 marks and 2.90 marks ($1.29 and $1.56) a kilo by year-end and rising above three marks early next year. Higher steel prices imply greater profitability at Acerinox, making the stock more attractive.

Stainless steel is now ranging between 2.70 marks and 2.80 marks a kilo. By comparison, a recent industry forecast held that prices could exceed three marks as early as September.

One London-based analyst discounted that projection, noting that if anything, steel prices are "more soft" than strong and could settle at around 2.70 marks a kilo. An analyst at the Madrid branch of a large international brokerage firm said that while the industry expects steel prices to rise following the summer months, the market is banking on the opposite.

In fact, he cautioned that domestic houses might not have a global picture. The analyst warned that now may be the time to switch out of Acerinox in favor of other shares in the sector that haven't experienced such strong price rises already in 1997 and thus may have more room to appreciate.

That's something to keep in mind if steel prices follow the trend projected by one analyst at a large international bank in Spain. The analyst expects prices to drift lower and to end 1997 at around 2.40 marks a kilo, still higher than the low of 2.25 marks hit in the third quarter of 1996.

But lower steel prices don't concern Fabian Ramon, head of research at brokerage firm Ahorro in Madrid. "Acerinox makes a lot of money even if steel prices are low," he said. "Acerinox is a company that has a good track record."

Mr. Ramon added that of all Spanish companies, Acerinox is one of the few consistently recommended by Ahorro. The brokerage firm has a "buy" rating on Acerinox stock and targets fair value at 35,000 pesetas. Mr. Ramon called Beta Capital's target of 37,500 pesetas "reasonable" as well.

Even if stainless-steel prices do fall, they aren't expected to hit 1996's lows, analysts agree. But neither are they seen revisiting 1995's highs, at least in the near future. Stainless-steel prices peaked at 4.10 marks a kilo in the first quarter of 1995.

For all of last year, Acerinox posted consolidated net profit of 14.86 billion pesetas, down 57% from 1995. In the first half of this year, earnings totaled 13.43 billion pesetas, up 42% from the year-earlier half.

And while some analysts are becoming cautious, citing fears that overproduction might glut the market, that didn't seem to phase a source at Acerinox. He said the company projects output of 820,000 tons in 1997, up 17% from a year earlier.

That's in line with comments earlier this year from Acerinox Chairman Victoriano Munoz. He said 1997 results would be "significantly higher" than 1996 earnings and noted that orders during the summer "low season" were fully booked.

At Acerinox's annual meeting in the spring, Mr. Munoz told shareholders that heightened demand is resulting from Europe-wide economic growth and should mean an annual rise in consumption of between 6% and 7% through 2000.

But while many analysts expect the strong dollar to boost profit at Acerinox in 1997, the company source said any effect should be limited. That's because Acerinox's dollar exposure is curtailed by its 95% stake in Kentucky-based North American Stainless.

"The dollar's appreciation doesn't affect us that much, except in relation to exports to Asia," the source said. The Asian market accounts for 15% of Acerinox's total exports.

That isn't expected to change soon -- Acerinox is still expanding hot -- and cold-rolling operations in the U.S. market, Ahorro's Mr. Ramon said. That's of particular relevance because Europe's stainless-steel market is often hit by overproduction -- quite the opposite of the U.S. market, where demand is expected to be stronger, analysts say.