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



U.S. Steel

In this article, we’ll do a comparative analysis of steel companies’ valuations based on forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization). U.S. Steel (X) has a forward EV-to-EBITDA of 2.9x its 2019 consensus EBITDA and 3.4x its 2020 consensus EBITDA. The stock’s forward valuation multiples are the lowest among the steel stocks that we’re covering in this series.

Nucor (NUE) has the highest valuation multiples in our coverage of steel stocks (XME). The stock is trading at an EV-to-EBITDA of 5.8x its 2019 expected EBITDA. AK Steel (AKS) and ArcelorMittal (MT) have a 2019 EV-to-EBITDA of 5.3x and 3.6x, respectively.

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On the face of it, U.S. Steel’s valuation looks quite compelling. However, we should remember that the valuation figures are as good as the earnings estimates used to arrive at the valuation multiple. Analysts polled by Thomson Reuters expect U.S. Steel to post EBITDA of $1.67 billion this year. Although analysts expect U.S. Steel’s earnings to fall on a year-over-year basis this year, the estimates still look somewhat elevated given the sharp fall in US steel prices. US spot HRC (hot roll coil) prices, which topped $900 per ton last year, are hovering near the $700 per ton level now.

While US steel prices seem to have bottomed out, any major upside looks unlikely as of now. While U.S. Steel’s earnings estimates look high, the company’s valuation would look reasonably attractive even if we factor in lower steel prices.

Overall, 2019 could be a better year for US steel stocks as compared to the last year. Markets discounted most negatives last year, leaving little downside for 2019.


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