On Monday, Bluescope Steel Ltd. (BSL:AU) (OTC: BLSFF) stock was downgraded by Jefferies from a "Hold" to an "Underperform" rating, alongside a price target adjustment to AUD17.80 from AUD21.63.
The downgrade was prompted by concerns over weakening construction markets in Australia and New Zealand, which are expected to lead to an unfavorable product mix shift. This shift is exacerbated by weak marked-to-market spreads in North America and Asia.
The firm noted that while earnings before interest and taxes (EBIT) guidance of $400-450 million for the first half of 2025 appears achievable, there is an approximate 30% risk of a downgrade to the consensus EBIT for the full year 2025.
The current trading price of Bluescope Steel is close to its long-term mid-cycle enterprise value to EBIT (EV/EBIT) multiple based on those same FY25 consensus estimates, which Jefferies believes leaves the stock vulnerable.
The analyst from Jefferies highlighted that the volatility in spreads is acknowledged, but the present market conditions are likely to impact the company's earnings negatively. The guidance provided by Bluescope for the first half of the fiscal year 2025 reflects the potential for a significant reduction in earnings compared to the market consensus for the full year.
Bluescope Steel's stock price is now being watched closely by investors as it approaches the long-term mid-cycle EV/EBIT multiple, which is a valuation metric used to assess the price of a stock relative to its earnings before interest and taxes. With the revised price target from Jefferies, there is an implied downside to the current share price based on these metrics.
The report concludes with a cautionary note on the vulnerability of Bluescope Steel's share price, given the current market dynamics and the potential for earnings to fall short of consensus expectations.
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