Why the US Steel Industry’s 4Q17 Outlook Is Hazy

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Part 9
Why the US Steel Industry’s 4Q17 Outlook Is Hazy PART 9 OF 9

US Steel Stocks: Are Risks Adequately Priced In?


In this part, we’ll look at steel companies’ valuation multiples. The multiples could help us understand how the markets are pricing different tailwinds and headwinds. We’ll look at the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple.

US Steel Stocks: Are Risks Adequately Priced In?

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EV-to-EBITDA multiples

U.S. Steel Corporation (X) is trading at 5.4x its 2017 consensus EBITDA and at 4.7x its consensus 2018 EBITDA. ArcelorMittal (MT), the world’s largest steelmaker, is trading at 5.0x its 2017 consensus EBITDA and 5.2x its consensus 2018 EBITDA. AK Steel (AKS) has an EV-to-EBITDA of 7.1x based on its consensus 2017 EBITDA. It’s trading at 5.8x its 2018 consensus EBITDA. Nucor (NUE) and Steel Dynamics (STLD) are trading at an EV-EBITDA multiple of 6.8x and 6.4x their respective 2018 consensus EBITDA.

Earnings estimates

Analysts expect steel companies’ EBITDA to rise on a year-over-year basis next year. ArcelorMittal is an exception—analysts polled by Thomson Reuters expect the company’s EBITDA to fall next year. While steel companies’ valuation multiples might look reasonable and in line with their long-term averages, it’s worth noting that these forward multiples are based on expected earnings.

Steel companies’ earnings are sensitive to spot steel prices. Analysts seem to assume higher average steel prices next year when determining steel companies’ earnings estimates. Currently, there isn’t a major positive trigger for US steel prices next year—apart from some sort of trade protection from the Trump Administration.

Markets might not be adequately factoring in the risks in valuing steel stocks. Meanwhile, there are several other metrics to value steel companies. You can read US Steel Valuations: The Plot Thickens for a detailed analysis of steel companies’ valuation.

You can also visit Market Realist’s Steel page for ongoing updates on the industry.


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