The BlueScope Steel Limited (ASX: BSL) share price could see further declines in the coming months, according to a broker. The S&P/ASX 200 Index (ASX: XJO) share has already fallen by more than 10% since 4 September 2023.
BlueScope describes itself as a global leader in metal coating and painting products for building and construction industries, providing "vital components for houses, buildings, structures, vehicles and more".
It's the sort of company that can be impacted by cyclical conditions. After recent strength in the last couple of years, it's now facing weakening conditions.
The broker Morgan Stanley has issued a warning about the ASX 200 share.
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BluseScope share price target downgrade
Morgan Stanley has changed its rating from overweight (buy) to underweight (sell) and also reduced that price target by 25% to $18, according to reporting by The Australian.
A price target is where an analyst thinks the share price will be in 12 months from now. Therefore, the broker is suggesting that the BlueScope share price could drop by another 6%. However, the scale of the price target reduction is the biggest news.
Morgan Stanley thinks there are "material" downside risks to what the market consensus of earnings estimates suggests for the ASX 200 share. Various analysts have differing expectations, but the average of all of those different projects is seen as the market consensus.
The Australian reported that the broker was concerned about decade-low Asian steel spreads and lower US spreads, and softer Australian residential construction in high-margin Colorbond volumes.
A steel spread can describe the difference in price between the raw material and the price of the finished good using that raw material.
Morgan Stanley went on to say:
We continue to view Bluescope as a high-quality cyclical, with good management and a strong balance sheet.
However, current spreads point to material risk to 2H consensus estimates. We would prefer to revisit when estimates are rebased and/or when commodity/end market trends are more favourable.
Valuation
Morgan Stanley may think that some analyst estimates are currently too optimistic, but the forecast on Commsec is as good as any. Commsec predicts that the ASX 200 share could generate $1.96 of earnings per share (EPS) in FY24, which would put it at just under 10x FY24's forecast profit.
