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Does U.S. Steel’s Valuation Look Attractive after the Sell-Off?

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Recent sell-off

As we noted previously in this series, U.S. Steel Corporation (X) has seen sharp negative price action after the company’s 1Q17 earnings miss and guidance cut spooked the market. After the big sell-off, it would be interesting to see how markets are valuing U.S. Steel. Let’s discuss this in perspective.

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Valuation multiples

There are several metrics that can be used to value a company. However, for steel companies like ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE), the EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.

Currently, U.S. Steel is trading at 5.4x its fiscal 2017 earnings and 4.4x its fiscal 2018 earnings. The valuation multiples look more or less in line with its valuation relative to peer companies as well as U.S. Steel’s long-term valuation multiples. U.S. Steel’s valuation multiples don’t exactly look attractive after the recent sell-off.

Key drivers

Any stock rises with an expansion of trading multiples or with an increase in earnings. For commodity companies (STLD), valuation multiples tend to peak when the economic cycle is about to take a turn for the better.

U.S. Steel’s valuation multiples have not fallen much, even with the large decline in its stock price after analysts slashed U.S. Steel’s forward earnings estimates after its 1Q17 earnings. According to consensus earnings estimates compiled by Thomson Reuters, analysts expect U.S. Steel to post an adjusted EBITDA of $965 million in 2017 and ~$1.2 billion in 2018.

After its disappointing 1Q17 earnings, U.S. Steel investors are now looking at a deteriorating macro picture. We’ll discuss this more in the next article.

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