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Must Know: Are Markets Efficiently Valuing U.S. Steel?

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U.S. Steel

U.S. Steel (X) is currently trading at 3.6x its next four quarters expected EBITDA (earnings before interest, tax, depreciation, and amortization). The valuation is based on its consensus EBITDA estimate of $1.25 billion for the next four quarters.

This valuation multiple would look attractive to investors who expect U.S. Steel to attain the EBITDA numbers that analysts are projecting. However, given the falling trend in US flat steel prices and U.S. Steel’s high leverage to flat steel prices, U.S. Steel’s actual EBITDA could be lower than what analysts are forecasting.

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Valuation multiples

We should remember that most steel companies (XME) including AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD) were trading above their long-term trading multiples between February and June 2016. These achievements were due to the sharp rally in this sector. Analysts also slowly increased their forward earnings estimates for steel companies. However, we saw most steel companies’ valuations revert to their long-term means as analysts started to revise steel companies’ earnings estimates.

Financial markets

Financial markets (DIA) are generally more efficient than analysts’ earnings estimates. Earlier this year, markets priced in higher steel prices before analysts started to factor higher steel prices into their earnings estimates. Now analysts seem to be slow in adjusting their earnings estimates.

We could see some more moderation in steel prices, especially in cold-rolled steel products. This would put pressure on U.S. Steel’s earnings. Also, the company’s raw material costs could increase in coming months, given the huge spike in coking coal prices. (You can read the Market Realist series How’s the Raw Material Market Impacting Steel Prices in 2016? to explore the trend in key steelmaking raw materials.)

In the next part, we’ll see how analysts are rating ArcelorMittal.

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