Why this broker thinks the BlueScope Steel Limited (ASX:BSL) share price will zoom ahead this month

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The share price of BlueScope Steel Limited (ASX: BSL) surged higher today but there’s probably more room for gains following today’s comments from Morgan Stanley.

The stock jumped 3.9% to $17.72 this morning, which makes it the third best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) after broadcaster Nine Entertainment Co Holdings Ltd (ASX: NEC) and gold miner St Barbara Ltd (ASX: SBM).

In contrast, the top 200 stock index is up 0.5% as the mining heavyweights like BHP Billion Limited (ASX: BHP) and the big banks like Commonwealth Bank of Australia (ASX: CBA) contributed to the rally.

While the positive market sentiment may not last with the US and China poised to slap each other with trade sanctions after our market closes today, BlueScope could continue to power on over the next 30 days, according to Morgan Stanley.

You can say that BlueScope is double-blessed. Morgan Stanley is tipping the stock to outperform the market in the short-term because of its bullish fundamental and quantitative take on the steel maker.

On the fundamentals front, the broker believes strong steel prices will boost the company’s bottom line when it reports its full year results next month. This supports Morgan Stanley’s “overweight” recommendation and $20 per share price target on BlueScope.

Meanwhile, the stock also screens well on the broker’s quantitative (or quant) screen. A quant screen is like a scorecard where an analyst will rate a stock on a number of measures.

Morgan Stanley found that four measures have historically been accurate at predicting share price performance of Australia’s materials stocks. This includes price momentum, value, capital use and earnings revision.

Value is based on enterprise value-to-earnings before interest, tax, depreciation and amortisation (EV/EBITDA) and forward price-earnings (P/E); while capital use looks at dividend yield, capex-to-sales and total cash to assets.

BlueScope scored well on almost all of these metrics except for dividend yield and maybe total cash to assets, although it ranked well on value and has a low capex-to-sales ratio (meaning it requires modest investment in the business to generate every dollar of sales).

“BSL is well positioned to benefit from elevated steel spreads in its key US and Australian markets,” said Morgan Stanley.

“With favourable earnings dynamics providing support for meaningful cash flow generation, in addition to a conservatively geared balance sheet, we believe BSL is poised to enter a new phase of increased capital management.”

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and BlueScope Steel Limited. 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 Scott Phillips.

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