Leading integrated steel producer United States Steel Corporation (X) operates through three segments: North American Flat-Rolled; U.S. Steel Europe; and Tubular Products in the United States and Europe. X’s stock has surged 57.5% year-to-date and 141.9% over the past year. The rally can be attributed to a spectacular rise in steel prices on robust demand as manufacturing and construction sectors ramp up their operations.
However, the stock may now have limited upside because the heightened steel prices are not expected to be sustainable. Furthermore, since President Biden’s infrastructure plan—which is expected to boost the steel industry demand—could face an uphill battle for passage, the industry’s growth prospects remain uncertain.
Although X has been benefitting significantly from its strategic acquisition of the remaining stake in Big River Steel, which delivered 32% EBITDA margins in the first quarter of 2021, its increasing expenses and decreasing cash equivalents could be a cause of concern.
Here is what we think could influence X’s performance in the near term:
Mixed Analyst Estimates
Analysts expect X’s EPS to rise 197.4% in the current quarter, ending June 2021. Its consensus EPS estimates indicate a 284.6% year-over-year rise in 2021, but a 71.9% slump in 2022. X has an impressive earnings surprise history; it beat consensus EPS estimates in each of the trailing four quarters. However, the $14.92 billion consensus revenue estimate for its fiscal year 2022 indicates an 11.8% decline year-over-year.
Uncertain Growth Outlook
President Biden’s $2.3 trillion infrastructure plan is expected to bolster the demand for steel this year. However, the bill still has many hurdles to cross to secure passage. As the President continues to seek to iron out objections to it in the Senate, the bill is currently not expected to be passed before year’s end.
Also, the big rally in global steel prices is expected to be short-lived now because increased production is driving up supply levels and could soon bridge the demand-supply gap. Consequently, we think steel stocks like X could witness a retreat in the near-term.
X’s net sales rose 33.3% year-over-year to $3.66 billion in the first quarter, ended March 31, 2021. The company’s net earnings were $91 million, compared to a $391 million net loss in the prior-year period. X’s adjusted EBITDA increased 760.9% from its year-ago value to $551 million. However, the company’s cash and cash equivalents at the end of the period were $882 million, compared to $1.5 billion in the prior-year quarter. Also, its total operating expenses increased 3.7% year-over-year to $3.24 billion.
The company’s 0.8% trailing-12-month asset turnover ratio is 23.8% higher than the industry 0.6% average. However, its 6.5% trailing-12-month gross profit margin is 77.6% lower than the 28.9% industry average. Also, its trailing-12-month ROE, ROA and ROTC came in at negative 16.4%, 4.7% and 1.9%, respectively.
In terms of forward non-GAAP P/E, X is currently trading at 3.13x, which is 80.9% lower than the 16.44x industry average. And its 3.32 forward EV/EBITDA multiple is 61% lower than the 8.52 industry average. Also, the company’s 1.15x trailing-12-month EV/Sales is 48.7% lower than the 2.25x industry average.
Consensus Rating and Price Target Indicate Potential Downside
Of 11 Wall Street analysts that rated the stock, five rated it Hold. X has a $15.52 consensus price target, indicating a 41.2% potential downside. The stock’s price target ranges from a low of $7 to a high of $28.
POWR Ratings Reflect Uncertain Prospects
X has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. X has a C grade for Sentiment. This justifies analysts’ mixed estimates.
It has a D grade for Quality. This is in sync with the company’s lower-than industry gross profit margin. In terms of Momentum Grade, X has an A. The stock’s 57.5% return so far this year, is in sync with grade.
Beyond the grades that we’ve highlighted, one can check out additional X ratings for Growth, Stability and Quality here.
Of the 33 stocks in the A-rated Steel industry, X is ranked #30.
There are several top-rated stocks in the same industry. Click here to view them.
A surge in steel prices and a significant uptick in worldwide steel demand have been fueling a rally in steel producer X’s stock price. But given that steel prices may decline in the near term with increasing supply, and that President Biden’s infrastructure bill is not expected to be passed until late this year, the outlook for the steel industry remains uncertain. So, we think it is better to wait for more clarity in X’s growth prospects before investing in the stock.
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X shares were trading at $26.49 per share on Wednesday morning, up $0.08 (+0.30%). Year-to-date, X has gained 58.12%, versus a 13.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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