U.S. Steel Corporation
U.S. Steel Corporation (X) has been among the worst performing steel stocks in 2019. The stock lost a quarter of its market capitalization. The stock fell almost 50% last year despite President Trump’s Section 232 tariffs. U.S. Steel Corporation has an EV-to-EBITDA multiple of 3.6x its 2019 estimates and 3.7x its consensus 2020 EBITDA. The valuation multiples look decent for an entry point. However, we also need to analyze the risk-return profile.
Like Nucor (NUE) and Steel Dynamics, U.S. Steel Corporation has been on an investment spree. However, unlike these companies, U.S. Steel Corporation has been investing in its existing plants. The company expects a massive structural improvement in its earnings from these investments. By 2020, U.S. Steel Corporation expects the asset revitalization plan to add $275 million–$325 million to its 2016 baseline EBITDA—assuming constant market factors like raw material costs.
Starting in 2023, U.S. Steel Corporation expects a $275 million annual EBITDA benefit from its Mon Valley investment. The company expects another $35 million in annual EBITDA benefits from the new Dynamo line in its Europe operations. U.S. Steel Corporation’s assumptions imply an additional $715 million in EBITDA from 2023, which is ~70% of its 2019 expected EBITDA.
Should you buy?
Going solely by U.S. Steel Corporations’s projections, we get a very rosy picture. Previously, the company announced millions of dollars of savings each quarter under its Carnegie Way program. However, these “savings” weren’t reflected in U.S. Steel Corporations’s earnings. The EBITDA was negative. US steel prices fell in the second half of 2015. U.S. Steel Corporation is expected to burn cash from 2019 to 2021 due to its capex plans. The company’s balance sheet doesn’t give it the kind of flexibility that Nucor and Steel Dynamics have. In 2016, U.S. Steel Corporation had to raise equity to shore up its balance sheet.
If US steel markets revive and global economic conditions get better, U.S. Steel Corporation could be among the biggest gainers in the steel space. Bulls also point to elevated iron ore prices as a bullish driver for U.S. Steel Corporation. The company’s iron ore operations aren’t fully reflected in its current valuation. Cleveland-Cliffs (CLF), which supplies iron ore to US steel companies, has outperformed steel stocks by a wide margin this year. Value unlocking through sales of the company’s Europe operations or iron ore assets might also drive the stock higher.