Stock Markets January 26, 2026

Morgan Stanley Cuts Tokyo Steel Rating and Lowers Targets After Q3 Miss

Analysts point to weak volumes, tight metal spreads and construction-sector headwinds as reasons for reduced earnings forecasts

By Ajmal Hussain
Morgan Stanley Cuts Tokyo Steel Rating and Lowers Targets After Q3 Miss

Morgan Stanley downgraded Tokyo Steel Manufacturing to underweight and trimmed its price target after the company posted weaker-than-expected third-quarter results and reduced full-year guidance. The bank cited softer sales volumes, continued pressure on metal spreads, labour shortages and higher construction costs as factors limiting demand recovery and margins. Morgan Stanley also sharply reduced its fiscal 2027 and 2028 operating profit estimates.

Key Points

  • Morgan Stanley downgraded Tokyo Steel to underweight and cut its price target to 1,300 yen from 1,500 yen after a Q3 earnings miss.
  • Tokyo Steel lowered full-year operating profit guidance to 8.2 billion yen from 9.5 billion yen, versus market expectations of about 10 billion yen, and expects near-zero operating profit in Q4.
  • Morgan Stanley trimmed fiscal 2027 and 2028 operating profit forecasts sharply amid weaker volumes, tight metal spreads, construction-sector labour shortages and rising costs.

Morgan Stanley has lowered its recommendation on Tokyo Steel Manufacturing (ticker 5423) to "underweight" following the company's third-quarter results, which came in below both market consensus and the bank's own forecasts. The brokerage also cut its price target to 1,300 yen from 1,500 yen, reflecting a more cautious outlook after the earnings update.

Analysts at Morgan Stanley said Tokyo Steel's fiscal third-quarter operating profit missed expectations due to softer sales volumes and ongoing pressure on metal spreads. The steelmaker reduced its full-year operating profit forecast to 8.2 billion yen from 9.5 billion yen - below market expectations of about 10 billion yen - and signalled that operating profit in the fourth quarter is likely to be close to zero.

The downgrade and target cut follow a string of structural headwinds identified by Morgan Stanley. Those include persistent labour shortages in Japan's construction sector, ongoing project delays and rising construction costs, which the bank said are restraining demand recovery and limiting Tokyo Steel's ability to pass higher costs through to customers.

In addition, Morgan Stanley highlighted commodity-side pressures. High scrap metal prices, together with increased competition from blast furnace operators moving into the electric arc furnace market, are expected to keep metal spreads under strain, further compressing margins.

As a result of these factors, Morgan Stanley significantly lowered its profit forecasts for the coming years. The bank cut its operating profit estimate for fiscal 2027 to 11 billion yen from 22.5 billion yen and for fiscal 2028 to 14 billion yen from 25 billion yen.

While the analysts acknowledged some early signs of demand stabilisation in smaller regional projects, they emphasised that supply-demand conditions overall remain soft, and therefore a near-term earnings recovery appears unlikely.


Market intelligence and model-driven screening

The article also noted that an AI-driven stock selection tool, ProPicks AI, evaluates 5423 alongside thousands of other companies using more than 100 financial metrics. The tool looks at fundamentals, momentum and valuation to identify potential ideas and cited past winners including Super Micro Computer (+185%) and AppLovin (+157%).

Risks

  • Persistently weak demand in construction could keep steel consumption subdued, impacting the construction and industrial materials sectors.
  • Elevated scrap metal prices and intensified competition from blast furnace operators moving into the electric arc furnace market may continue to compress metal spreads and margins in the steel sector.
  • Ongoing project delays and rising construction costs could limit the company's ability to pass higher input costs to customers, increasing pressure on profitability.

More from Stock Markets

Moody's Raises Twilio to Ba1, Cites Growth Trajectory and Conservative Financial Discipline Feb 2, 2026 Moody's Raises OUTFRONT Media Credit Rating to Ba3, Citing Lower Leverage and Digital Push Feb 2, 2026 Moody's Moves Mister Car Wash Outlook to Positive as Credit Metrics Improve Feb 2, 2026 S&P Elevates SM Energy to BB After Civitas Deal, Cites Bigger Footprint and Diversification Feb 2, 2026 NXP Sees Strong Start to Quarter, Cites Automotive Strength and Stable Industrial Demand Feb 2, 2026