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Four Reasons U.S. Steel Corporation Looks Like a Decent Buy

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U.S. Steel Corporation

As we saw in the previous part of this series, U.S. Steel Corporation’s (X) valuation, based on its forward EV[1. enterprise value]-to-EBITDA, looks attractive and is significantly lower than Nucor (NUE), ArcelorMittal (MT), and Cleveland-Cliffs (CLF). Now let’s see whether U.S. Steel Corporation could be a decent opportunity.

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2018 shipments

U.S. Steel Corporation could see an incremental rise of 1.5 million tons of steel shipments next year, provided the demand continues to stay strong. The additional tons are expected from its Granite City, Illinois, facility. Higher shipments could add to its earnings since US steel companies are making strong margins amid higher spot steel prices.

Although spot steel prices have corrected, they are still higher than what we saw at the beginning of the year. If spot HRC (hot rolled coil) prices settle near the current levels, it could boost the contract prices for U.S. Steel Corporation, specifically for the contracts that roll over at the beginning of 2019.

During the second-quarter earnings call, the company pointed out that almost 40% of its US flat rolled shipments have annual fixed price contracts, and 75% have reset from January 1. AK Steel (AKS) is also expected to benefit from higher contract prices next year.

Balance sheet

U.S. Steel Corporation’s liabilities on its balance sheet and its off-balance sheet are in much better shape than the 2015 cyclical lows. Its asset revitalization plan should help it structurally improve its earnings. By 2020, it expects its slab production capacity to increase 1 million tons and add $275 million–$325 million to its 2016 baseline EBITDA, assuming constant market factors.

In summary, while the macro environment has deteriorated somewhat for U.S. Steel Corporation, the stock may offer value at its current price.

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