U.S. Steel Corporation
U.S. Steel Corporation (X) has fallen 14.1% in April and 8.0% year-to-date. Last week, Bank of America Merrill Lynch and Credit Suisse downgraded U.S. Steel Corporation citing overcapacity and pricing concerns. Bank of America Merrill Lynch also cited U.S. Steel Corporation’s expected cash burn from 2019 to 2021. Credit Suisse said that U.S. Steel Corporation “is in a weaker competitive position versus peers.”
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The overcapacity situation might not be as bleak as some analysts have been fearing. Rising domestic steel production would likely be accompanied by import substitution. The Trump Administration is working towards quotas for granting Section 232 exemptions that should also help lower steel imports.
Chinese steel prices
One thing that bears seem to be ignoring is the strength in Chinese steel prices, which should support steel prices elsewhere. While the spreads between the US and global steel prices are expected to fall as domestic mills compete for business, stability in Chinese steel prices would provide some support to US steel prices.
On U.S. Steel Corporation’s expected cash burn, the company is investing in its plants after years of apparent underinvestment. While cash burn could be a cause of concern, it should be seen in the context of the expected improvement in U.S. Steel Corporation’s operating and financial metrics once it completes the asset revitalization plan. U.S. Steel Corporation is holding a significant amount of cash on its balance sheet, which should help cushion any negative free cash flows.
From a valuation standpoint, U.S. Steel Corporation has an EV-to-EBITDA multiple of 3.55x its 2019 consensus EBITDA and 3.63x its 2020 expected EBITDA. The consensus EBITDA estimates of $1.20 billion for 2019 and $1.23 billion for 2020 don’t look too high. U.S. Steel Corporation appears to offer good value at these price levels.