United States Steel Corporation (X) and ArcelorMittal (MT) are the world’s leading companies in the steel manufacturing and production space. X operates primarily through three segments — Flat-Rolled Products (Flat-Rolled), U.S. Steel Europe (USSE) and Tubular Products (Tubular). MT mainly operates through five segments — NAFTA, Europe, Brazil, Africa, and Commonwealth of Independent States (ACIS), and Mining.

With the  resumption of operations across several steel-consuming sectors in the second half of last year,  companies in the steel production space are expected to gain in the coming months. Both X and MT are strategically positioned to benefit  from an anticipated vaccine-driven full economic recovery and President-elect Joe Biden’s expected infrastructure spending.

While X has returned 110.6% over the past five years, MT has gained 97.6%. In terms of past-year performance, X is a clear winner with 59.6% returns versus MT’s 41.6%. But which of these two stocks is a better pick now? Let’s find out.

Latest Movements

X announced in  December that it had completed  the sale of its non-core real estate asset, the Keystone Industrial Port Complex (KIPC), in Fairless Hills, Pennsylvania, for which it received roughly $160 million in cash. Earlier that month,  the company announced that it had exercised its call option to acquire the remaining equity of Big River Steel. In the words of David B. Burritt, President and CEO of United States Steel Corporation,  “We are acquiring Big River Steel, the cornerstone of our ‘Best of Both’ strategy.”

The company announced the closing of a $63.4 million issue of Environmental Improvement Revenue Bonds with a green bond designation on November 24. X is expected to use the proceeds to partially fund work related to its newly constructed, technologically advanced electric arc furnace (EAF) steelmaking facility at its Fairfield, Alabama, operations.

In December, MT announced the extension of the conversion date to January 31, 2024 for  $1 billion privately placed mandatory convertible bonds (MCB). The MCB was issued in  December 2009 by one of its wholly owned Luxembourg subsidiaries. The company announced on December 15 that it had entered a separate, privately negotiated exchange agreements with a limited number of holders of the Company’s 5.50% Mandatorily Convertible Subordinated Notes due 2023.

MT also announced in December that it had signed a binding agreement with Invitalia, an Italian state-owned company, to create a public-private partnership. The first investment is expected to be made by this month. It will provide Invitalia with joint control over the company’s subsidiary, AM InvestCo. On December 9, MT announced the close of the sale of ArcelorMittal USA to Cleveland-Cliffs for a combination of cash and stock.

Recent Financial Results

X’s net sales increased 11.9% sequentially to $2.3 billion for the third quarter ended September 30, 2020. While net sales from flat-rolled products increased 16.9% sequentially to $1.8 billion, net sales from its United States’ Steel Europe segment increased 22.8% sequentially to $496 million. Total steel shipments increased more than 19% sequentially to 3,016 (thousands of net tons).

MT’s sales for the third quarter ended September 30, 2020 increased 20.9% sequentially to $13.3 billion. Operating income increased 141.8% year-over-year to $718 million. While crude steel production increased 19.4% sequentially to 17.2 Mt, steel shipments increased 18.2% sequentially to 17.5 Mt. Iron ore shipped at market price increased 16.7% year-over-year to 9.8 Mt.

Expected Financial Performance

Analysts expect X’s revenue to increase 0.2% for the quarter ending March 31, 2021, and 19.2% in 2021. The company’s EPS is expected to grow 4.7% for the quarter ended December 31,2020, and 95.2% in 2021. Moreover, its EPS is expected to grow at a rate of 8% per annum over the next five years.

In comparison, the market expects MT’s revenue to increase 17.8% for the quarter ending March 31, 2021, and 9.7% in 2021. The company’s EPS is expected to grow 122.7% for the quarter ended December 31, 2020 and 234.9% in 2021. Moreover, MT’s EPS is expected to grow at a rate of 272.2% per annum over the next five years.

Thus, MT has an edge over X here.

Profitability

MT’s trailing-12-month revenue is 5.46 times X’s.Moreover, MT is more profitable with a gross margin of 3.6% versus X’s 1.3%.

Valuation

In terms of trailing-12-month P/S, MT is currently trading at 0.46x, 48.4% more expensive than X, which is currently trading at 0.31x. However, MT is less expensive both in terms of trailing-12-month EV/S (0.61x versus 0.72x), and trailing-12-month price to book (0.79x vs 1.07x).

In terms of trailing-12-month price/cash flow, MT’s 4.36x is lower than X’s 26.98x.

POWR Ratings

While X is rated “Buy” in our proprietary POWR Ratings system, MT is rated “Strong Buy.” Here are how the four components of overall POWR Rating are graded for X and MT:

X has a “B” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “C” for Peer Grade. It is currently ranked #12 of 29 stocks in the Steel industry.

MT holds an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. It is currently ranked #1 in the same industry.

The Winner

Both X and MT are good investment bets considering their market dominance and growth potential with the expected economic recovery. However, MT appears to be a better buy based on its higher revenue and earnings growth potential, and reasonable valuation.

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MT shares were trading at $24.12 per share on Tuesday morning, up $0.17 (+0.71%). Year-to-date, MT has gained 5.33%, versus a -1.47% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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