The reason I chose U.S. Steel was due to the recent decline in price over the past few months. I was swing trading U.S. Steel in 2018 and have it on my watch list and decided this company would be a good one to look into. The steel industry currently has a 25% tariff on steel imports. Which offers some protection to steel companies within the United States. I don’t see this tariff being lifted as long as president Donald Trump is in office. The fear of a global economic slowdown my theory on the cause of US Steel’s decline. I am looking for a overreaction to this fear and a possible buy opportunity at a discount. The current PE ratio is at 2.11 and is extremely cheap. I thought it might be a good value stock to get into since the market is beating it up.

 

COMPANY AND INDUSTRIAL BACKGROUND

 

United States Steel Corporation was founded in 1901 by Elbert Gary, Willaim Moor and J.P. Morgan. It is headquartered in Pittsburgh, Pennsylvania. In 2017 U. S. Steel was the third largest steel producer in the United States and the twenty-sixth largest steel producer in the world. U.S. Steel has annual raw steel production capability of 22.0 million net tons with 17.0 million tons in the United States and 5.0 million tons in Europe. It is an integrated steel producer of flat rolled and tubular products, with customers primarily in the automotive, consumer, industrial and oil market. In 2018 they had revenues of $14 billion and is considered a mid-cap stock in the S&P Midcap 400 index. United States Steel Corporation’s ticker symbol is $X and is trading at 12.05 as of 8/11/2019.

United States is the world’s largest steel importer with over $49 billion dollars of iron and steel imports in 2014. This demand is mainly from the development of the country and the need for producing weapons to be used for defense production as well. An increase in global crude steel output can be seen in the past few years. Global Steel output increased by 4.6% in 2018 and .1% in the USA in 2018. A global increase in output and continued demand in a slowing economic environment can be favorable for the steel industry. Demand for steel increased by 2.1% in 2018 and is expected to continue into 2019 and 2020. Steel demand in the United States benefited from the fiscal stimulus driven by the government in 2017-2018. This may be a good indicator that demand will continue from the lowering of interest rates announced in July.

 

RISK ASSESSMENT

There are several risks associated with U.S. Steel Corporation. U.S. Steel depend on the operation performance of key structures and pieces of equipment such as blast furnaces, steel shops, casters, hot strip mills and other various structures. The reliability of these critical structures and pieces of equipment have great effect on the performance of U.S. Steel. Although U.S. Steel is taking proactive measures to maintain key machinery and equipment at their facilities, they may still experience reduction in productivity and increase maintenance and repair costs from failures.

It is possible that operation may be disrupted due to circumstances such as power outages, accidents, floods, fires, severe weather conditions and changes in the U.S., Europe and other foreign tariffs, trade agreements, regulations laws and politics. These risks may involve customers, suppliers are both, causing sales to decrease, raw materials to increase in cost or both. Which may cause certain facilities to become idle, there are certain costs associated with idle production. Resumption of idled facilities also have added cost which is a risk that must be considered.

At the current moment global steel production capacity significantly exceeds global steel demand. This overcapacity results in high levels of subsidized steel imports into the U.S. and European market. There are currently tariffs and quotas in place that provide relief from these imports. However, recent possibility of tariffs may be applied to materials and items purchased from countries or region that are part of the manufacturing process. This possible increase in cost may cut into margins and lower profits.

Steel demand is highly cyclical and generally follows the economic cycle worldwide and in regional markets. This makes it difficult to maintain a certain level of raw materials and energy for production. The volatility of these cycles makes it difficult to price steel, raw materials and predict consumer demand. Periodically steel producers find it difficult to obtain sufficient raw materials and energy in a timely manner. This problem faced by steel producers may constrain operating levels, may reduce profit margins or increase steel prices. In such events, consumers make look to alternative materials to meet their needs.

 

EXTERNAL FACTORS

Iron is the main component in steel and the price of iron ore is on the rise. Due to a large supply drop in iron ore and an upside surprise in Chinese steel consumption has caused many analysts to raise their forecast. Goldman predicts a 12% increase to $91/mt, The Canadian bank lifted its iron forecast by 24% to $82/mt. An external factor benefiting the steel industry at the moment is the low price of oil.

OPEC is bearish on oil prices for the rest of 2019 and into 2020. With President Donald Trump in office, oil prices should continue to be low and benefit the steel industry. Since the United States is currently the largest oil producer in the world. However, this could all change after the 2020 election if Donald Trump is not reelected. Mineral costs and oil prices might not change anything if the economy is slowing.

Although the economic health of the United States is strong, GDP growth is expected to slow in the coming years. GDP growth is expected to slow to 2% in 2020 and 1.8% in 2021.This slowdown in growth will cause many companies to reevaluate their own growth and spending. The expected slowdown is supported by the expected increase in the unemployment rate, which is expected to increase slightly to 3.7% in 2020 and 3.8% in 2021.

 

GROWTH EXPECTATION

Over the next 5 years, the analyst that follow X expect it to grow earnings at an average annual rate of 8%. Analyst expect a negative earnings growth of 87% next year which could hurt US Steel if the company’s financials are not managed correctly. The world steel association expect demand to grow by 1.0% in 2020. For my financial valuation,  I used a 1% growth rate for the next few years because I am pessimitic about the growth of the industry.

 

WACC

Gurufocus.com: 12.07%

Self-calculated: 8%

 

FINANCIAL STATEMENT ANALYSIS

Metric $X
Price / Earnings 2.02
Price / Book 0.54
Price / Sales 0.16
EV / EBIT 3.96
EV / EBITDA 2.6
Price to FCF n/a
Quick Ratio 0.8
Debt to EBITDA 1.55
Dividend Yield 1.51
Debt to Equity 0.57
Enterprise Value 4.0 B
Market Cap. 2.29 B
ROE 29.63
ROA 10.09
Piotroski – F score 7
ROIC / WACC 25.17 / 13.79

 

According to the financial statement metrics above, U.S. Steel looks cheap but that is because its FCF is low and investors are less likely to invest in the company. The industry is also not expected to grow much in the near future. This means return on investment for investors will be low and tied up for a few years, making it a less attractive industry and company to enter. The debt to equity is pretty good and shows that U.S. Steel is managing their debt well and not over-leveraging. It has good returns on equity and assets making its use of capital and assets effective and efficient. U.S. Steel will be more attractive once it is able to produce positive free cash flow.

INTRINSIC VALUATION

Refer to Excel worksheet for DCF and Horizon value.

RELATIVE VALUATION

The reason NUE, AKS and CMC were chosen as comparable companies, they are all steel companies that compete for market share within the United States. The steel industry in the United States has been around a long time and with shrinking sales due to cheaper steel from global suppliers there’s greater competition. My valuation is based on the fact that U.S. Steel is able to withstand an economic recession and be able to come out gaining market share. To get an idea of how strong U.S. Steel is to its U.S. counterparts, I compared their financial metrics. I am looking for U.S. Steel to be financially stronger than its competitors.

Metric X NUE AKS CMC   Average
Price / Earnings 2.02 7.41 5.25 11.98 6.67
Price / Book 0.54 1.56 6.35 1.25 2.43
Price / Sales 0.16 0.65 0.13 0.35 0.32
EV / EBIT 3.96 6.02 9.18 10.94 7.525
EV / EBITDA 2.6 4.91 5.53 7.24 5.07
Price to FCF n/a 11.4 6.04 13.26 10.23
Quick Ratio 0.8 1.76 0.76 1.86 1.295
Debt to EBITDA 1.55 1.1 3.63 3.08 2.34
Dividend Yield 1.51 3.01 n/a 2.88 2.47
Debt to Equity 0.57 0.42 16.32 0.87 4.55
Enterprise Value 4.0 B 19.15 B 3.37 B 3.21 B 7.4325
Market Cap. 2.29 B 15.94 B 863.73 Mil 1.96 B 4.71 B
ROE 29.63 22.32 178.71 4.6 58.82
ROA 10.09 12.35 3.56 4.6 7.65
ROIC / WACC 25.17 / 13.79 19.25 / 10.18 16.38 / 11.38 9.06 / 10.85 17.47 / 11.55
Piotroski – F score 7 9 6 7 7

 

 

  $X Price $X Metric Average Multiple Adj $X Price
Debt to Equity 0.57 4.55 Good
DEBT to EBITDA 1.55 2.34 Good
Quick Ratio 0.8 1.295 Below average
Price to Earnings 13.27 2.02 6.67 3.3 43.78 Undervalued
Price to Sales 13.27 0.16 0.32 2.02 26.75 Undervalued
Price to FCF 13.27 0 10.23 0 0 Overvalued
Return on Assets 10.09 7.65 Above average
Piotroski – F score 7 7 Average

 

The rating score was based on a scale from 0-8, 0-4 SELL, 5-6 HOLD, 7-8 BUY. United States Steel score a 5 which is a HOLD.

When comparing United States Steel with its peers the metrics show that it is doing better than half of the companies compared. However, some of the metrics that it did not do well brought up serious concerns. The main one being the negative free cash flow in an economy that is firing on all cylinders. If they are unable to have positive FCF now it will be more difficult in a slowing economy.

 

RECOMMENDATION

In Conclusion, I recommend a “Hold” on the company. The company is fairly cheap when compared to its peers. When performing a relative valuation U.S. Steel should be around $23.51 a share. When performing a intrinsic valuation on the company the average price of U.S. Steel should be 10 cents a share. I would enter with a small position of U.S. Steel under $11.80 if Trump is reelected. If iron prices drop and the trade war is resolved, I will add more to the position. My price target for U.S. Steel will be at 23.50 the relative valuation price, since it is at the top of the valuation prices.

 

US STEEL INC. 2017 2018 2019 2020 2021 2022
INTEGRATED FINANCIAL STATEMENT
INCOME STATEMENT 2017 2018 2019 2020 2021 2022
Revenue  $         12,250  $         14,178  $          14,320  $         14,463  $         14,608  $         14,754
          Growth (%) 1% 1% 1% 1% Analyst predict that there will be a less than 1% growth in 2020
Cost of Sales  $         10,858  $         12,305  $          12,560  $         12,686  $         12,813  $         12,941
          % of sales 89% 87% 88% 88% 88% 88%
Gross Profit  $           1,392  $           1,873  $             1,759  $           1,777  $           1,795  $           1,813
          % of sales 11% 13% 12% 12% 12% 12%
Operating Expense (SG&A)  $               320  $               336  $                374  $               378  $               382  $               385
          % of sales 3% 2% 3% 3% 3% 3%
Operating Income (EBIT)  $           1,072  $           1,537  $             1,385  $           1,399  $           1,413  $           1,427
Interest Expense  $               226  $               168  $                117  $               115  $               113  $               112
Pretax Income  $               846  $           1,369  $             1,268  $           1,284  $           1,300  $           1,316
Income Tax Expense  $                 86  $               303  $                266  $               270  $               273  $               276
Tax Rate NM NM 21% 21% 21% 21%
Net Income 760 1,066  $             1,002  $           1,015  $           1,027  $           1,040
Operating Income (EBIT) 1,072 1,537 1,385 1,399 1,413 1,427
Depreciation 501 521  $                556  $               561  $               567  $               573
Amortization 0 0 0 0 0 0
EBITA 1,573 2,058 1,941 1,961 1,980 2,000
BALANCE SHEET 2017 2018 2019 2020 2021 2022
Current Assets
          Cash  $           1,553  $           1,000  $             2,037  $           3,021  $           4,017  $           5,025
          Accounts Receivables 1,379 1,659  $       1,643.79  $     1,660.23  $     1,676.83  $     1,693.60
Inventories 1,738 2,092  $       2,072.95  $     2,093.67  $     2,114.61  $     2,135.76
Other current assets 85 79  $                   79  $                 79  $                 79  $                 79
Total Current Assets  $           4,755  $           4,830  $             5,833  $           6,854  $           7,887  $           8,933
Investments and long-term receivables, less allowance of $5 and $11 (Note 12) 480 513 513 513 513 513
Property, plant and equipment, net (Note 13) 4,280 4,865 4,871 4,876 4,882 4,888
Intangibles — net (Note 14) 167 158 163 163 163 163
Deferred income tax benefits (Note 11) 56 445 445 445 445 445
Other noncurrent assets 124 171 148 148 148 148
TOTAL ASSETS  $           9,862  $         10,982  $          11,972  $         12,998  $         14,037  $         15,089
Current Liaibilities
Accounts payable and other accrued liabilities  $        2,148 2454  $       2,494.84  $     2,519.79  $     2,544.99  $     2,570.44
Accounts payable to related parties (Note 23) 74 81 81 81 81 81
Payroll and benefits payable 347 440 455 471 485 500
Accrued taxes  $           132 118 118 118 118 118
Accrued interest 69 39 39 39 39 39
Short-term debt and current maturities of long-term debt (Note 17) 3 65  $             34  $            34  $            34  $            34
Total Current Liabilities  $           2,773  $           3,197  $             3,222  $           3,263  $           3,302  $           3,342
Long Term Liabilities
Long-term debt, less unamortized discount and debt issuance costs (Note 17) 2,700 2316 2,282 2,248 2,214 2,180
Employee benefits (Note 18) 759 980 870 870 870 870
Deferred income tax liabilities (Note 11) 6 14 10 10 10 10
Deferred credits and other noncurrent liabilities 303 272  $                288  $               288  $               288  $               288
TOTAL LIABILITIES  $           6,541  $           6,779  $             6,671  $           6,678  $           6,683  $           6,689
Common Stock 176 177 177 177 177 177
Treasury stock, at cost (2,857,578 shares and 1,203,344 shares)  $               (76)  $           (78)  $            (78)  $           (78)  $           (78)  $           (78)
Additional paid-in capital 3932 3917 3917 3917 3917 3917
Retained earnings 133 1212  $             2,214  $           3,228  $           4,255  $           5,295
Accumulated other comprehensive loss (Note 21)  $          (845)  $       (1,026)  $        (1,026)  $       (1,026)  $       (1,026)  $       (1,026)
Total stockholders’ equity 3,320 4,202 5,204 6,218 7,245 8,285
Non controlling interest 1 1 1 1 1 1
TOTAL LIABILITIES & STOCKHOLDERS DEFICIT  $           9,862  $         10,982  $          11,876  $         12,897  $         13,930  $         14,975
CHECK  $                    –  $                    –  $                   96  $               100  $               107  $               114
BALANCE SHEET ASSUMPTIONS
AR Days 41 43 42 42 42 42
Inventory Days 58 62 60 60 60 60
AP Days 72 73 72 72 72 72
CASH FLOW STATEMENT 2017 2018 2019 2020 2021 2022
CASH FLOW FROM OPERATING ACTIVITIES
Net Income  $             1,002  $           1,015  $           1,027  $           1,040
Add Back Non-Cash Items
          Depreciation  $                556  $               561  $               567  $               573
          Amortization 0 0 0 0
Change in Working Capital
          Accounts Receivables 15 (16) (17) (17)
          Inventory 0 0 0 0
          Accounts Payable 41 25 25 25
                    Net Cash Provided by Operating Activities  $             1,633  $           1,585  $           1,603  $           1,621
CASH FLOW FROM INVESTING ACTIVITIES
          Capial Expenditures – Purchase of PP&E  $              (561)  $             (567)  $             (573)  $             (579)
                    Net Cash Used in Investing Activities  $              (561)  $             (567)  $             (573)  $             (579)
NET CASH FROM FINANCING ACTIVITIES
          Revolving Credit Facility (Line of Credit) 0 0 0 0
          Long Term Debt (34) (34) (34) (34)
                    Net Cash Provided by (Used In) Fnce Acitivities  $                (34)  $               (34)  $               (34)  $               (34)
Net Cash Flow  $             1,037  $               983  $               996  $           1,008
Beginning Cash Balance  $             1,000  $           2,037  $           3,021  $           4,017
Ending Cash Balance  $             2,037  $           3,021  $           4,017  $           5,025
SUPPORTING SCHEDULES
DEBT SCHEDULES 2017 2018 2019 2020 2021 2022
Cash Balance @ Beg of Year (End of Last Year)  $             1,000  $           2,037  $           3,021  $           4,017
Plus: Free Cash Flow from Operations and Investing  $             1,071  $           1,017  $           1,030  $           1,042
Plus: Free Cash Flow from Financing (Before L.O.C.) 0 0 0 0
Less: Minimum Cash Balance  $             1,277  $           1,277  $           1,277  $           1,277 < Average cash balance of 2017 and 2018
Total Cash Available of (Required) from L.O.C.  $                795  $           1,778  $           2,774  $           3,783
Line of Credit 0 0 0 0 0 0
Debt
Long Term Debt, Net of Current Maturities  $           2,700  $           2,316  $             2,282  $           2,248  $           2,214  $           2,180
Current Portion of Long Term Debt  $                    3  $                 65  $                   34  $                 34  $                 34  $                 34 < Average of of 2017 and 2018
Interest Expense
Interest Rate on Long Term Debt 5% 5% 5% 5%
Interest Rate on Line of Credit 0% 0% 0% 0%
Interest Expense on Long Term Debt  $                117  $               115  $               113  $               112
Interest Expense on Line of Credit  $                    –  $                  –  $                  –  $                  –
Total Interest Expense 117 115 113 112
PP&E SCHEDULE 2017 2018 2019 2020 2021 2022
Beg: PP&E, Net of Accum Depreciation  $             4,865  $           4,871  $           4,876  $           4,882
Plus: Capital Expenditure  $                561  $               567  $               573  $               579 < Capital expenditure projected to grow with income
Less: Depreciation USED TO PROJECT  $                556  $               561  $               567  $               573
          Depreciation as % of Revenues 4.09% 3.67% 3.88% 3.88% 3.88% 3.88%
End: PP&E, Net of Accum. Depreciation  $             4,871  $           4,876  $           4,882  $           4,888

 

US Steel compared to other steel companies

as of 8/3/19
Metric X NUE AKS CMC
Price / Earnings 2.02 7.41 5.25 11.98
Price / Book 0.54 1.56 6.35 1.25
Price / Sales 0.16 0.65 0.13 0.35
EV / EBIT 3.96 6.02 9.18 10.94
EV / EBITDA 2.6 4.91 5.53 7.24
Price to FCF n/a 11.4 6.04 13.26
Quick Ratio 0.8 1.76 0.76 1.86
Debt to EBITDA 1.55 1.1 3.63 3.08
Dividend Yield 1.51 3.01 n/a 2.88
Debt to Equity 0.57 0.42 16.32 0.87
Enterprise Value 4.0 B 19.15 B 3.37 B 3.21 B
Market Cap. 2.29 B 15.94 B 863.73 Mil 1.96 B
ROE 29.63 22.32 178.71 4.6
ROA 10.09 12.35 3.56 4.6
ROIC / WACC 25.17 / 13.79 19.25 / 10.18 16.38 / 11.38 9.06 / 10.85
Piotroski – F score 7 9 6 7
$CMC Price $CMC Metric Average Multiple Adj $CMC Price
Debt to Equity 0.87 4.55 Good
Debt to EBITDA 3.08 2.34 Bad
Quick Ratio 1.86 1.30 Above average
Price to Earnings 16.65 11.98 6.67 0.56 9.26 Overvalued
Price to Sales 16.65 0.35 0.32 0.92 15.34 Undervalued
Price to FCF 16.65 13.26 10.23 0.77 12.85 Overvalued
Return on Assets  $   16.65 4.6 7.65 1.66  $       27.69 Below average
Piotroski – F score  $   16.65 7 7 1.00  $       16.65 Average
$AKS Price $AKS Metric Average Multiple Adj $AKS Price
Debt to Equity 16.32 4.55 Bad
DEBT to EBITDA 3.63 2.34 Bad
Quick Ratio 0.76 1.30 Below average
Price to Earnings 2.73 5.25 6.67 1.27  $         3.47 Undervalued
Price to Sales 2.73 0.13 0.32 2.48  $         6.77 Undervalued
Price to FCF 2.73 6.04 10.23 1.69  $         4.63 Undervalued
Return on Assets  $     2.73 3.56 7.65 2.15  $         5.87 Below average
Piotroski – F score  $     2.73 6 7 1.17  $         3.19 Below average
$NUE Price $NUE Metric Average Multiple Adj $NUE Price
Debt to Equity 0.42 4.55 Good
DEBT to EBITDA 1.1 2.34 Good
Quick Ratio 1.76 1.30 Above average
Price to Earnings 52.57 7.41 6.67 0.9 47.28 Undervalued
Price to Sales 52.57 0.65 0.32 0.5 26.08 Overvalued
Price to FCF 52.57 11.4 10.23 0.90 47.19 Undervalued
Return on Assets 52.57 12.35 7.65 0.62 32.56 Above average
Piotroski – F score 52.57 9 7 0.78 40.89 Above average
$X Price $X Metric Average Multiple Adj $X Price
Debt to Equity 0.57 4.55 Good
DEBT to EBITDA 1.55 2.34 Good
Quick Ratio 0.8 1.295 Below average
Price to Earnings 13.27 2.02 6.67 3.3 43.78 Undervalued
Price to Sales 13.27 0.16 0.32 2.02 26.75 Undervalued
Price to FCF 13.27 0 10.23 0 0 Overvalued
Return on Assets 10.09 7.65 Above average
Piotroski – F score 7 7 Average