United States Steel: Looking Past the Weakness

United States Steel (X) has lost around 63% of its market value in the past one year on account of lower volumes and depressed pricing. It has been further affected by steel dumping from other countries into the U.S., which has severely weighed on domestic steel manufacturers. As a result of these headwinds, United States Steel stock has tanked considerably. Let’s see whether this fall in its stock prices could be used as an investment opportunity or not.

Weak financials are a headwind, but there are positives

Last quarter, its revenue for the quarter fell 34% from a year ago to $2.9 billion, while reporting an adjusted loss of 79 cents per share.

This was way lower than the EPS of 17 cents in the same period last year. Analysts, on the other hand, were expecting a loss of 65 cents per share. Despite its poor top and bottom line performance, U.S. Steel has strong cash and liquidity position of approximately $2.7 billion, which will be sufficient to make the needed investments to execute on its long-term value creation strategy.

Meanwhile, in the light of these headwinds the company has resolved to cost cutting measures that will enable it to streamline its balance sheet. Consequently, it has managed to improve the operating margin of its flat rolled segment, which more than offset the $73 per tonne decrease in its average selling price.

Its tubular segment is still under pressure on account of reduced drilling activity, coupled with near record levels of tubular imports. Going forward, investors must not expect any quick turnaround in this segment since oil is still below $50 level. As per the Financial Post, “I don’t think (oil) prices sub-US$50 are really high enough to justify a pickup in drilling in the U.S., if anything, I think they should be pulling back,” Scotiabank vice-president and commodity market specialist Patricia Mohr said.”

Cost-cutting moves indicate good progress

U.S. Steel’s Carnegie Way strategy has resulted in a gain of $590 million for 2015 as compared to last year. According to CFO Dave Burritt “The large increase in 2015 Carnegie Way Benefits is the result of the completion of almost 800 projects in the second quarter and reflects the tremendous efforts of all of our employees, particularly in the areas of manufacturing and procurement where we have our greatest opportunities for improvement.”

In addition, U.S. Steel will continue to make new investment to implement its Carnegie Way driven reliability centered maintenance program at all its facilities. This should lead to more consistent, efficient, cost effective and safe operating conditions along with achieving operational excellence.

Going forward, U.S Steel intends to further expand its portfolio of differentiated solutions for its customer. In this direction, it is progressing with the acquisition of the remaining 50% interest in Double Eagle Steel Coating. This will enhance its ability to develop and commercialize proprietary advanced high strength steels including coated generation three grades. In this manner, it will be able to provide its automotive customers with high quality, light weight products that meet increased safety and fuel economy standards and keep steel as their material of choice.

Conclusion

All in all, United States Steel is making the right moves that will improve its position in the days to come. Moreover, its valuations are quite impressive at current levels as it has a P/S multiple of 0.11, which is lower than the industry average of 0.27. Also, it has a forward P/E of 11.86 as compared to the industry’s trailing P/E of 12.36, indicating that its earnings will improve. Therefore, in the light of these growth prospects, the current dip in its stock price could be used as a long-term opportunity.

Published on Oct 18, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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