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Are U.S. Steel’s Low Valuation Multiples a Value Trap?

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Sep. 6 2016, Published 12:22 p.m. ET

Valuation multiples

There are several metrics that can be used to value a company. However, for companies in cyclical industries such as mining (GNR), EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.

In this part, we’ll look at U.S. Steel Corporation’s (X) forward EV-to-EBITDA multiple. Then, we’ll compare it with its historic valuation multiple. This approach will help us understand whether U.S. Steel is trading at a discount or at a premium to its historic multiples.

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Valuation multiples fall

Currently, U.S. Steel trades at 3.82x its expected EBITDA for the next four quarters. This is much lower than U.S. Steel’s historic valuation multiples. For instance, the company’s forward EV-to-EBITDA multiple averaged 7.14x in the last three years and 6.57x in the last five years. Also, U.S. Steel is trading at a steep discount to other steelmakers including ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE).

Value trap?

U.S. Steel’s valuation multiples might look mouthwatering. However, it’s important to note that a low valuation multiple doesn’t necessarily mean that an investor should enter the stock. There are several other metrics that you should be looking at. The first and most crucial metric would be to look at the earnings estimates used to calculate these valuation multiples.

In the next part of the series, we’ll look at U.S. Steel’s forward earnings estimates. This will help us understand if the stock looks cheap at these price levels.

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