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U.S. Steel Corporation’s Capex Plans: Markets Aren’t Convinced

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U.S. Steel Corporation

U.S. Steel Corporation (X) has lost 13.2% in 2019. The company is underperforming other US-based steel companies. AK Steel (AKS) and Nucor (NUE) are trading with year-to-date gains of 8.9% and 9.9%, respectively. The SPDR S&P Metals and Mining ETF (XME) has gained 8.0% in 2019. Overall, 2018 wasn’t any better for U.S. Steel Corporation. Last year, the stock fell almost 48%.

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Valuation

From a valuation perspective, U.S. Steel Corporation has a 2019 and 2020 EV-to-EBITDA multiple of 4.23x and 4.0x, respectively. The valuation multiples are based on the consensus EBITDA of $1.1 billion for 2019 and $1.2 billion for 2020. U.S. Steel Corporation is battling weak steel prices in the United States and Europe. Given the current market scenario, investors are concerned about the longevity of the longest economic expansion in history. A recession doesn’t seem to be around the corner. Slowdown proponents have toned down the rhetoric. Economic growth has surprised on the upside this year.

Cash concerns

U.S. Steel Corporation needs to convince markets that it will be able to derive the EBITDA benefits from its investment plans. For now, markets are more concerned about the cash burn from these investments instead of the long-term benefits. While U.S. Steel Corporation tried to justify its capex plans during its first-quarter earnings call, some analysts weren’t convinced. Recently, UBS downgraded U.S. Steel Corporation to a “sell” and put a $10 target price on the stock.

If U.S. Steel Corporation can derive the kind of structural EBITDA benefits that it’s expecting with its capex plans, it could be a game changer for the company. However, the company announced millions of dollars of savings each quarter under its Carnegie Way program. The dollar savings weren’t really reflected in the company’s earnings.

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