After U.S. Steel reported an awful quarter last week and its stock dropped from $31 to $22, Jim Cramer decided to vet the steel producers cohort to see whether the weakness was widespread.
"Not all steelmakers are created equal. Some are a lot more equal than others," the "Mad Money" host said. "When you look at the major American steel players — and there, you've got to think AK Steel, Nucor, Steel Dynamics, and the troubled U.S. Steel — what you see is a wide range of companies with very different characteristics."
Having heard quarterly reports from all of these major players, it became clear to Cramer that steel, a commodity, was not at the center of U.S. Steel's underperformance.
"In other words, Nucor and Steel Dynamics seem to be in pretty good shape. They're both up slightly for 2017, while U.S. Steel and AK Steel have been put through the meat grinder, down 35 and 43 percent, respectively," Cramer said.
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The divide between these steel players starts with manufacturing. AK Steel and U.S. Steel do so traditionally, buying iron ore and coal and smelting it into steel.
Nucor and Steel Dynamics use mini-mills instead, melting scrap steel with electric furnaces and tinkering with the carbon content. Cramer said companies that use mini-mills have been performing much better than the traditionalists because the process adds a little more value.
And the steel cohort has been struggling for years, the "Mad Money" host noted. The whole group was crushed by the 2008 financial crisis, then again in the second half of 2014.
"The culprit? Two things: one, all the emerging market economies that had been such voracious buyers of steel started to slow down, and two, in order to combat its own slowdown, the Chinese government started subsidizing steel production. China then dumped their excess steel all over the world at depressed prices, including right here in the United States," Cramer explained.
Then, when former President Barack Obama placed tariffs on steel imports from seven countries including China in 2016, the steel stocks started to rally.
However, now that those tariffs have been baked into the stocks and the tariffs are old news, the game becomes based on merit, Cramer said.
While AK Steel's quarter wasn't as bad as U.S. Steel's huge miss, bearish guidance from its management team still drove the stock down 10 percent.
Nucor's earnings report, on the other hand, showed sales up 30 percent over year, and management forecast an improvement in business in the second quarter.
The stock rallied 5 percent, though Cramer admitted that could have been because President Donald Trump announced he would take further steps to protect steel producers from foreign competition.
"Of course, the White House hasn't decided to do anything yet other than investigate the issue, but some broader based tariffs, if we get them, could give the industry a real boost," he added.
Steel Dynamics delivered a big earnings beat, with sales much higher than anticipated showing 36 percent growth year over year. Its stock climbed 7 percent on the news.
So with U.S. Steel the worst of the four by far, with AK Steel only slightly better, which steelmaker wins between Nucor and Steel Dynamics?
"In the end, I'm going to go with Nucor — it's a higher quality company, better management, slightly faster earnings growth, low cost, and a more consistent track record, which is why I've been telling members of the ActionAlertsPlus.com club that they should be buying it, as we've been doing for my charitable trust. Steel Dynamics — very close second," Cramer said.
When it comes to their stocks, however, you get what you pay for. Cramer suggested paying up for Nucor, which trades at 13 times next year's earnings estimates, because it has the best dividend of the four, offering shareholders a 2.5 percent yield.
"And I bet that if business stays as strong as it is right now, they could declare a special dividend. They've done that in the past," Cramer said.
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