INVESTMENT THESIS
U.S. Steel Corp. (NYSE: X). On the 3Q conference call, management noted that steel demand and prices were improving. The company has also agreed to acquire the remaining stake in Big River Steel for about $774 million. Management expects the acquisition to be immediately accretive to earnings. We have a favorable view of this acquisition and expect it to drive growth in 2021 and beyond. Our target price of $22 implies a total potential return of 14%, including the dividend.
RECENT DEVELOPMENTS
On October 29, U.S. Steel reported a 3Q20 non-GAAP net loss of $1.21 per share, wider than the loss of $0.39 per share in 3Q19 but better than our loss forecast of $1.50. Third-quarter sales fell to $2.3 billion from $3.1 billion.
EARNINGS & GROWTH ANALYSIS
In the U.S. Steel Europe segment, earnings before interest and taxes came to $13 million, up from a loss of $46 million a year earlier. The results reflected higher shipments, partly offset by lower average prices.
On the 3Q conference call, management said that a market recovery was underway and that it expected this recovery to continue into 1Q21. The company is also ahead of schedule on its goal of reducing fixed costs by $200 million.
In October, in cooperation with Big River Steel, the company started up its electric arc furnace at Fairfield, Alabama. On November 24, the company closed on $63.4 million of environmental improvement revenue bonds to help finance the furnace.
Based on the better-than-expected 3Q results, we are narrowing our 2020 loss estimate to $5.18 per share from $6.20.
FINANCIAL STRENGTH & DIVIDEND
It generated third-quarter cash flow of $76 million, after reducing its ABL borrowing by about $900 million. Debt totaled $5.1 billion, and accounted for 63% of total capitalization.
U.S. Steel pays a dividend. In December 2019, the company cut the quarterly dividend to $0.01 to conserve cash.
MANAGEMENT AND RISKS
David Burritt has been CEO and president of United States Steel since May 2017 after holding a number of senior positions at the company. Kevin Bradley stepped down as the company’s CFO on November 4, 2019, and was succeeded by Christie Breves. The company’s chairman is David S. Sutherland.
Investors in X shares face numerous risks. The steel industry is extremely cyclical and highly competitive.
The company and its peers face risks from the dumping of low-cost foreign steel, though they are beginning to see greater pricing power due to tariffs on imports from China, India, South Korea and other countries.
COMPANY DESCRIPTION
U.S. Steel , founded in 1901, is an integrated steelmaker with manufacturing capacity of more than 22 million tons at plants in North America and Eastern Europe.
VALUATION
On December 8, BUY-rated X closed at $19.47, up $2.28.
Source: Argus
