The U.S. Department of Commerce has announced final import tariffs on Chinese cold-rolled and corrosion-resistant steel that could help stabilize global steel prices and protect domestic producers. Steel prices have risen, partly as a result of these tariff actions, and also because of recent global capacity reductions to avoid adding to a glut. Domestic steel stocks, such as U.S. Steel (X) and AK Steel (AKS), have responded favorably. So have shares of global giant ArcelorMittal (MT). Each of these stocks have doubled, tripled or more since December 2015-February 2016 lows.
These actions are now yielding stabilization and/or improvement in cash flow at the mill level, depending on the region. So as I look for read-throughs, I come to Harsco (HSC). Harsco was initiated as my first Real Money Best Idea on May 11, as a down-and-out industrial conglomerate with plenty of upside.
Pennsylvania-based Harsco's largest segment, Harsco Metals, serves the largest steel mills globally with equipment and services to assist in the manufacturing and management of waste products from integrated steel mill operations. This is a big and dirty, capital-hog of a business and Harsco is one of the best at it. The company serves customers, like ArcelorMittal, with long-term service contracts at margins that can range between 5% and 10%. With its Excell and Reed subsidiaries, Harsco has the mechanism to take useless waste from production and turn it into something useful (and high margin), including aggregate additives, fertilizers and roofing granules.
Stabilization of pricing and regional production is a very positive development for Harsco Metals. This, in addition to management's hard work to restructure or eliminate profitless contracts, is the beginning of incremental upside to segment profits, the largest driver of Harsco's earnings per share and cash flow conversion in coming quarters.
Harsco is the most special of special situations. The company will eventually rejigger its portfolio of businesses, sell or spin off non-core assets and focus on asset-light components of the business at Harsco Rail and Harsco Industrial. For now, however, the macro environment, with price protections, rising prices and stabilizing production, could provide a much needed tailwind for earnings and cash flow, while the company shifts gears strategically.
The stock was at $18 in July of last year. It sits around $6 today. The sky is the limit for this little-known Industrial conglomerate.
