X Stock Forecast: Analysts Are Bearish, Stock Is too Cheap to Ignore

U.S. Steel Corporation (X) stock is trading higher in premarkets after the company reported better-than-expected third-quarter earnings. It also increased the dividend and announced a share buyback program. Wall Street analysts have been getting bearish steel stocks including X. What’s the forecast for X stock and is it a good buy?

X stock is up 36 percent YTD but has lost almost 24 percent from its 52-week highs. The stock is in a bear market territory because it has fallen over 20 percent from the peaks.

It has been a stellar earnings season for U.S. steel companies and they're posting record earnings amid the steep rise in commodity prices. U.S. Steel reported net sales of $5.96 billion in the quarter compared to $2.34 billion in the same period in 2020.

X reported an adjusted EBITDA of $2.02 billion in the quarter. It was a record quarter for U.S. Steel in terms of net earnings, EBITDA, and EBITDA margins. The company also ended the quarter with record liquidity and had over $2 billion as cash on its balance sheet at the end of the quarter.

U.S. Steel announced a $0.05 per share dividend and a $300 million share repurchase program. The strong cash position would help U.S. Steel fund its growth and bring deleveraging opportunities.

Wall Street analysts have been turning bearish on U.S. steel stocks including X. In October, Morgan Stanley double downgraded X stock from “overweight” to “underweight.” It's unusual for analysts to downgrade a stock by two notches.

Morgan Stanley analyst Carlos De Alba expects U.S. steel prices to fall from these levels. Alba is bearish on X stock because he thinks that the company’s pivot towards EAFs (electric arc furnaces) will hit free cash flows in the short term. Goldman Sachs also thinks that steel prices will fall and downgraded both Nucor and X stock.

Despite the pessimism from analysts, the forecast for X and other U.S. steel stocks looks positive. As for the macro environment, while U.S. steel prices should eventually come down since these levels aren't sustainable, the undercurrents in the steel markets are strong.

If the bipartisan infrastructure bill gets approved, it would also lead to higher steel demand in the U.S. In 2022, U.S. steel companies would face a tailwind in the form of contract pricing. Cleveland-Cliffs (CLF), which is a major steel supplier to automotive companies, would especially benefit from higher contract pricing.

Also, while some analysts are apprehensive about X amid its investment plan, the company has a clear path towards shedding its legacy assets and transforming into a modern steelmaker. One aspect markets are missing is the structural improvement in U.S. Steel’s earnings after it completes the capex.

As U.S. Steel modernizes its plants, it would also see a valuation multiple rerating. For a long time, it has traded at a discount to minimills. After the company completes its business transformation, its valuation discount with minimills like Nucor and Steel Dynamics would narrow.

X still looks like a good buy. The company’s market cap is just about $6 billion, which is only about 3x of its third-quarter EBITDA. While some concerns about the steel cycle look legitimate, X is simply too cheap to ignore at these levels.