Our largest steel producer is a stock that the market loves to hate. The BlueScope Steel Limited (ASX: BSL) share price swings is enough to give even the most seasoned theme park visitors a case of vertigo.
While the stock looks like it will close the year near its 52-week high of $14.92, shareholders had to endure a roller coaster ride to a trough of $10.50 in the middle of the year as the company is caught between Trump's tariffs and margin pressure.
But for those who endured, the upside for the stock might be far more significant than what even the most bullish broker is forecasting.
Acquisition multiple
This very optimistic view stems from Cleveland-Cliffs' surprise US$1.1 billion acquisition of AK Steel. Credit Suisse speculates that the multiples suggested in the transaction would value BlueScope's shares at $24 a pop!
That implies a 60% plus upside to the share price before dividends. That blows past the price target from any broker covering BlueScope – even Credit Suisse, which pegged a target of $15.30 and is recommending the stock as "outperform".
If you added AK Steel's debt to the acquisition offer, it would imply an enterprise value of around US$3 billion. Comparing that to calendar 2020 consensus earnings before interest, tax, depreciation and amortisation (EBITDA), the multiple comes up to 8 to 8.5 times. This is how Credit Suisse came up with the $24 a share calculation.
Is BlueScope cheap?
I don't think anybody would seriously think that BlueScope could be reaching those levels in 2020, but it sure is food for thought. The stock looks cheap in my view despite its 31% gain this year compared with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index's 19% return.
But compared to some of its peers in the construction materials space, BlueScope looks like it can run further. The CSR Limited (ASX: CSR) share price rallied nearly 70% this year while the James Hardie Industries plc (ASX: JHX) share price surged 88% and is at a near record high.
Brokers polled on Reuters are dividend on BlueScope with five of the eight (including Credit Suisse) rating it a "buy". But the average price target on the stock is $17.40 a share, which suggests a more than 15% upside.
Foolish takeaway
Some are reluctant to buy the stock as management is undertaking an ambitious expansion of its North American business at a time when sceptics believe the market might be oversupplied.
However, given that the stock is only trading on a FY21 price-earnings multiple of around 13 times, I think there is a comfortable amount of buffer for any bad news. I am not saying the stock is set to jump 60% over the next 12-months, but I do see further upside for BlueScope in 2020.
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