US Steel Stock Sizing (NYSE:X)
This world of withered leaves and melting snow may not be a perfect world, but it is the only real one.– Marty Rubin
Steel in the United States (NYSE:X) has seen a sharp rise in its shares in recent weeks. Insiders have sold more than $2.5 million worth of shares so far in March and there is also substantial short interest currently in the stock. Signs of this recent rally may fade in the coming weeks. We attempt to answer this question through the analysis below.
US Steel is one of the largest steel producers in North America and is based in Pittsburgh. The company produces flat-rolled and tubular steel products primarily for sale in North America and Europe. With the purchase of Big River Steel and the completion of their Fairfield, AL mini-plant in 2021, the company has achieved industry-leading mini-plant capabilities. The stock currently sells for just over $35.00 per share and has an approximate market capitalization of $8.6 billion.
Fourth quarter results:
On January 27, the company released its fourth quarter results. On a non-GAAP basis, US Steel earned $3.64 per share, about 60 cents per share below consensus. Revenue rose nearly 120% from a year ago to $5.62 billion, some $270 million more than expected. Adjusted EBITDA for the quarter was nearly $1.73 billion.
In mid-February, the company’s chief financial officer announced that she would step down soon, even though she had held the position for less than a year. On March 17, the company announced that it now expects first-quarter earnings in the range of $2.96 to $3.00 per share. That’s well below the $3.77 per share that was the analyst consensus at the time. Management blamed the shortfall on ‘~$150 million related to seasonal mining headwinds that occur each year in the first quarter, as well as increased raw material costs and a larger than expected headwind resulting from activity cautious in the cash market‘.
Despite these recent negatives, the stock has continued to rise. One of the main factors in this counter-intuitive decision is the war in Ukraine. Morgan Stanley noted this two weeks ago when it updated the name from Sell to Hold and raised its price target by ten dollars per share to $31. Morgan’s analyst noted at the time.
The current dislocation in the global steel market and rapidly rising scrap metal/metal prices may halt the continued decline in US steel prices. [hot-rolled coil] due to soaring commodity prices. US Steel has its own iron ore mines and is better positioned than its peers to weather rising commodity prices.”
The analyst also ‘expects higher raw material cost inflation for steel companies, but believes US Steel will fare better than its peers given its vertical integration in iron ore and relatively less exposure to electric arc furnaces.’
Seeking Alpha noted this morning that ‘Aluminum and steel stocks rise as Australia bans alumina exports to Russia and Europe considers banning Russian steel.‘
Analysts’ comments and results:
The analyst community is negative on the company’s outlook so far in 2022. So far this year, four analyst firms, including Citigroup and, as previously reported, Morgan Stanley, have holding or holding ratings. sale on the action. Price targets offered range from $24 to $34 per share. Only GLJ Research ($42.75 price target) reiterated a buy rating on X so far in 2022.
Three insiders have sold just over $2.5 million worth of shares so far in March. None of them was the resigning CFO. That includes a company executive who sold nearly $2.2 million worth of stock on March 4. This represented more than 80% of his current stake in the company. In addition, more than 15% of the floating outstanding is currently sold short.
The company ended 2021 with low leverage (0.7X) on its balance sheet after generating over $3.2 billion in free cash flow in fiscal 2021.
The current analyst consensus is that US Steel will make $10.40 per share of earnings in fiscal 2022 with a wide range of estimates ($7.75 to $15.50) as revenue remains flat at just over $20 billion. Analysts see both earnings ($3.25 per share on average) and revenue ($15.5 billion) plunge in fiscal 2023.
The stock is very cheap on a traditional earnings and cash flow basis. The company’s balance sheet also looks rock solid for a cyclical manufacturer. The question for investors is, how long do the good times last for the sector? US Steel hemorrhaged money in fiscal year 2020, largely due to the pandemic, and was just above breakeven in fiscal year 2019 after earning more than five dollars a year. profit share in fiscal year 2018.
Despite the cheap valuation, I don’t buy US Steel. If/when the war ends in Ukraine or if there is some sort of ceasefire, commodity stocks like Mosaic (MOS) and US Steel that benefited from the impacts of this conflict are very likely to give up to a good portion of those gains. This is why only one analyst firm has a price target above the stock’s current trading levels.
Giving alms to the rich is a luxury that no beggar can afford.– Marty Rubin
Bret Jensen is the founder and author of articles for The Biotech Forum, Busted IPO Forum and Insiders Forum