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Why the BlueScope Steel Limited (ASX:BSL) share price is surging today

The BlueScope Steel Limited (ASX: BSL) share price is bucking the market downtrend as the stock is among the best performers on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index this morning.

The BlueScope share price jumped 2.1% to $12.40 in early trade when the top 200 stock benchmark slipped 0.1% into the red after management reaffirmed its profit guidance at the steel maker’s annual general meeting today.

The BSL share price has been underperforming since the August reporting season and has crashed by a third over the period.

Fears of that it will be next in line to issue a profit downgrade due to the housing construction slowdown and narrowing steel price spreads seem to be overblown in light of today’s announcement.

But BlueScope isn’t the only ASX stock to be sold off on similar fears. The James Hardie Industries plc (ASX: JHX) share price, Boral Limited (ASX: BLD) share price and Reliance Worldwide Corporation Ltd (ASX: RWC) have also been punished.

Profit outlook

BlueScope confirmed that it’s on track to deliver a 10% increase in its underlying earnings before interest and tax (EBIT) in the first half of the current financial year over 2HFY18 when it reported an EBIT of $745 million.

The company reported that demand for its products from its key markets (the US, Australia and New Zealand) remains strong with “buoyant business conditions in key product end-use segments”.

Steel spreads in Asia and the US may have moderated since August but management pointed out that they remain significantly above their historical averages even though costs have been rising.

The downturn in the Australian property market doesn’t seem to be hurting the company either as its products are mainly used in renovations and remodelling as well as detached housing construction; while the building slowdown is mainly in multi-storey construction.

While US home construction has also slowed markedly in recent months, its Northern Star business continues to run at full capacity and orders remain strong, although customer lead times have increased.

On the flipside, the company is reporting some weakness in its South-East Asian operations while rising costs is something investors will need to keep an eye on.

Foolish takeaway

The sell-off in BlueScope’s share price looks overdone to me and the stock is cheap as it’s trading on an FY20 consensus price-earnings (P/E) multiple that’s under 8 times.

Further, BlueScope has a strong balance sheet and I believe the slowdown in US housing construction is also temporary and we will start to see a pick-up in activity in early 2019.

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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited, Boral Limited, and Reliance Worldwide 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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