The Zacks Analyst Blog Highlights:ArcelorMittal, U.S.Steel, Nucor, Eaton and Parker-Hannifin

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Aug 30, 2012, 09:30 ET

CHICAGO, Aug. 30, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include ArcelorMittal (NYSE:MT), U.S. Steel Corporation (NYSE:X), Nucor Corporation (NYSE:NUE), Eaton Corporation (NYSE:ETN) and Parker-Hannifin Corporation (NYSE:PH).

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Here are highlights from Wednesday's Analyst Blog:

Global Steel Output Rises in July

Global crude steel production rose in July following a modest decline a month ago, according to a recent World Steel Association ("WSA") report. The international trade body for the iron and steel industry said that crude steel output for 62 reporting nations edged up 2% year over year in July to 130 million tons (Mt).

This compares favorably with a 0.1% decline in June. Slower growth in Asia, especially China, coupled with a sharp decline in the European Union led to the slump in production last month.

The growth in July mostly came on the heels of a 3.8% increase in output in Asia which produced 85.3 Mt of crude steel. Steel output clipped in the European Union, South America and Africa/Middle East while improved modestly in North America.

Growth was witnessed across major Asian producers. China, the largest steel producing country, registered an increase of 4.2% in output to 61.7 Mt. Japan, the second largest producer, recorded a 1.2% increase to 9.3 Mt. Production rose 5.4% to 6.6 Mt in India and 4.4% to 5.9 Mt in South Korea.

In North America, crude steel production edged up 0.9% to 7.4 Mt in the U.S., the third-largest steelmaker. Output in Canada jumped 12.7% to 1.2 Mt while falling 7.6% to 1.5 Mt in Mexico.

In the Europe Union, output from Germany nudged down 2.1% to 3.6 Mt while rising 6.6% to 0.9 Mt in the UK. Production declined 5.6% in France and 7.8% in Italy to roughly 1.4 Mt and 2.4 Mt, respectively. Spain and Turkey witnessed a 7% and 9.7% increase in output, respectively.

Overall output dropped 4.9% in the European Union to 14.2 Mt. The decline largely reflects the recessionary conditions in the region, which have led to a frail demand environment.

Among other notable producers, Brazil's output fell 4.1% to 3 Mt while Russia registered a 3.6% increase to 5.9 Mt. Ukraine logged a 5.7% increase to nearly 3 Mt.

The WSA said that crude steel capacity utilization ratio for the reporting countries fell to 78.7% in July 2012 from 80.4% in June. The ratio also declined 0.8% year over year.

The global slowdown has taken its toll on the steel industry. Steel prices have been bludgeoned by weak demand and overcapacity in the industry. Furthermore, the festering Euro-zone sovereign debt crisis and its impact on the global economy remain an overhang on the industry. Moreover, steel producers have been clobbered by surging prices of key raw materials such as iron ore and coking coal.

A sluggish construction market, oversupply in the industry, sticky situation in Europe and slowing growth in emerging economies have weighed on the performance of major steelmakers, including ArcelorMittal (NYSE:MT), U.S. Steel Corporation (NYSE:X) and Nucor Corporation (NYSE:NUE), in the June quarter. Decline in steel prices has been hurting margins and profits of steel players.

According to the WSA, world crude steel production reached 1,490 Mt in 2011. China alone accounted for roughly 46% of the output with Japan and the U.S. representing 7% and 6%, respectively.

The WSA envisions global steel usage to rise 3.6% this year, a decline from 5.6% growth in 2011. This reflects continuing slowdown of Chinese steel demand and the European debt crisis. Nevertheless, the industry body anticipates some recovery in 2013 and expects steel usage to grow 4.5%.

Eaton Expands in South America

Eaton Corporation (NYSE:ETN) announced its decision to acquire Santiago-based Rolec Comercial e Industrial S.A. This acquisition will expand Eaton's operations on Latin American soil, further strengthening its existing base in Brazil and Mexico.

Rolec Comercial e Industrial S.A. primarily engages in the manufacture of integrated power assemblies, and low- and medium-voltage switchgears. In addition, the company provides engineering and mining services, and also offers heavy industrial applications. Apart from Chile, the company also has presence in Peru.

In view of Eaton's last few acquisitions, it is evident that the company is intent on diversifying its portfolio while expanding its line of businesses as well as global footprint, particularly in Europe, Middle East and Africa ("EMEA"), the Asia-Pacific region ("APAC") and now in Latin America, by taking the inorganic route.

In July 2012, Eaton completed the acquisition of a South Korean company called Jeil Hydraulics, a manufacturer of track and swing drive motors, main control valves and remote control valves. This transaction is expected to bolster Eaton's presence in the emerging markets and also expand its product coverage, with respect to its motor item segment.

As of June 30, 2012, the company had cash and short-term investments of $1.18 billion compared with $1.08 billion as of December 31, 2011. We believe Eaton's strong cash position enables it to pursue a steady inorganic growth approach.

Following its adoption of an aggressive acquisition strategy, Eaton already experienced positive impacts in second-quarter 2012. In the last couple of quarters, the company inked some significant deals, which include the acquisition of E.A. Pedersen Company and IE Power, Inc. Riding on these acquisitions, the company's sales for the Electrical Americas segment edged up 1% year over year. In addition, we believe that decline in cost of goods sold and lower tax rate will likely benefit the company in the second half of 2012. Electrical Americas is also expected to report a strong performance in the second half of 2012.

However, we are concerned about volatile currency market conditions and slow economic growth rate in the emerging countries, primarily in China, India and Brazil, which might have a negative impact on Eaton's future results.

Eaton Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Cleveland, Ohio-based Eaton Corporation offers an array of products, such as powertrain, truck and automotive systems, electrical components and systems, hydraulics and pneumatic systems for commercial and military use. The company competes with Parker-Hannifin Corporation (NYSE:PH).

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