Top broker says buy Sims Metal Management Ltd shares

The Sims Metal Management Ltd (ASX: SGM) share price rose to a multi-year high of $17.57 on Tuesday following the release of a positive research note out of Goldman Sachs.

This brought the scrap metal company’s annual return to an impressive 42%.

What did the note say?

According to the note, the broker has reiterated its conviction buy rating and $17.74 price target.

The broker made the move after U.S. data showed a 25% year-on-year increase in total ferrous scrap exports during November. This has been driven by a strong rebound in global electric arc furnace steel production and demand for ferrous scrap as the primary raw material input.

As Sims Metal Management is the largest ferrous scrap processor and exporter in the United States, Goldman Sachs’ analysts believe it is positioned perfectly to benefit from this demand.

So much so, Goldman is tipping Sims Metal Management to upgrade its outlook in the near future, potentially acting as a catalyst to driving its shares higher.

For the first-half of FY 2018 the broker expects the company to deliver earnings before interest and tax (EBIT) of $134 million, leading to full-year EBIT of $291 million. This is approximately 21% higher than the consensus EBIT estimate of $240 million.

Should you invest?

While Goldman Sachs’ price target has nearly been breached now, I do think Sims could still be worth considering due to the favourable tailwinds it is experiencing.

However, an earnings surprise does appear to be baked into its share price now, so investors may want to hold off until the company next updates the market. Anything better than Goldman’s EBIT of $134 million in the first-half is likely to drive its shares higher.

In the meantime, sector peers Fortescue Metals Group Limited (ASX: FMG) and Western Areas Ltd (ASX: WSA) could be worth a closer look.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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