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Should you buy Bluescope Steel Limited for some strong gains?

The steel-maker Bluescope Steel Limited (ASX: BSL) has attracted a lot of market attention recently within a not so hot sector. Manufacturing in Australia has seen a number of companies, like the auto makers, decide that production costs aren’t matching expected business revenues.

So why is the biggest Australian steel maker up 17% in share price in the last three months?

Building materials demand up

The rise in housing construction is pushing up building materials makers like Boral Limited (ASX: BLD) and James Hardie Industries plc (ASX: JHX) as demand for plasterboard, wall paneling and cladding rises. So as the maker of the iconic Colorbond fencing and roofing materials, Bluescope is also seeing better sales from the higher demand.

Not just in Australia, but in ASEAN, India and North America building materials sales are improving. As economies are up after the GFC, construction levels increase. The US housing market has made great strides after recovering the real estate market bust.

Iron sands business

The New Zealand business segment has increased its production of iron sands, which it vacuums up from the ocean bed in New Zealand and then produces a low-cost iron unit feed. It is expanding operations and estimates it can produce about 4,000,000 tonnes a year from the available iron sands for the next 15 years.

Acquisitions

Within the past four months, it completed the acquisitions of Orrcon and Fielders, both steel products manufacturers, from Hills Ltd (ASX: HIL). In addition, it has agreed to buy the OneSteel sheet and coil business from Arrium Ltd (ASX: ARI) and the ACCC has declared it will not oppose the purchase.

Lastly, this month the company has entered into an agreement to buy the assets of Pacific Steel, a subsidiary of Fletcher Building Limited (ASX: FBU) to supply its NZ steel-making business.

Foolish takeaway

By picking up parts of competitors’ businesses and assets, it can consolidate its market-leading position more, improve earnings and create cost savings in production and materials.

The stock’s PE is 52 because of the small earnings per share that it made in the first half after net losses in 2012-2013. The market is expecting further increases in the second half when three of its newly acquired companies contribute to revenue. It may pay to watch the stock for further developments and wait for more advantageous share prices.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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