There are several metrics that can be used to value a company, including the PE (price-to-earnings) multiple. However, for capital-intensive industries such as steel, the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric.
Furthermore, we need to look at a stock’s forward valuation multiples to see how the markets are valuing it for each dollar of its expected EBITDA.
U.S. Steel Corporation (X) is valued at an EV of 5.7x its 2018 consensus EBITDA and 5.2x its 2019 expected EBITDA. The stock saw a valuation multiple expansion last month. U.S. Steel was trading at a 2018 EV-to-EBITDA multiple of 4.8x in the first week of February. In comparison, AK Steel (AKS) is valued at a 2018 EV-to-EBITDA multiple of 7.0x.
With its 2018 EV-to-EBITDA of 5.0x, ArcelorMittal (MT) is the least expensive stock in our coverage of steel companies (STLD). Nucor (NUE) is the most expensive stock with a 2018 EV-to-EBITDA multiple of 7.4x. However, it’s worth noting that Nucor has historically traded at a premium to its peers. The company’s sound financial position and variable cost structure are among the key drivers of its premium valuation.
What to expect
U.S. Steel’s valuation multiples now look to be in line with their historical averages. Remember, however, that forward valuation multiples are arrived at based on analysts’ earnings estimates. It’s therefore prudent to look at valuation multiples in conjunction with earnings estimates.
Analysts’ estimates can tend to lag, as we saw in 1Q16 when the financial markets rerated steel stocks long before analysts raised their earnings estimates.
In the next article, we’ll see what analysts are projecting for U.S. Steel’s 2018 earnings.