UKRAINE – 2021/12/18: In this photo illustration, U.S. Steel (United States Steel Corporation)(USS) … [+]
The shares of United States Steel Corporation (NYSE: X) have declined by about 20% year-to-date and remain down by almost 50% from their March 2022 highs. The sell-off comes as multiple factors appear to cloud the outlook for the steel industry. China – the world’s largest steel consumer – has been enforcing a zero-Covid policy, which has resulted in stringent lockdowns in several provinces, hurting the demand from the industrial and construction sector, and resulting in higher inventory levels. Moreover, the U.S. Federal Reserve and other major central banks have also been hiking interest rates at a more aggressive pace to combat surging inflation. This could hurt global growth and, in turn, impact steel demand from the key consumers including the automotive and construction industry.
Now, U.S. Steel has had a solid run in recent quarters, amid surging prices. For example, over Q1 2022, total sales rose 42% despite a decline in volumes, with price realizations for flat-rolled products surging by over 50% year-over-year to $1,368 per ton. The company expects the momentum to hold up over Q2 as well, recently guiding that it expects EBITDA of $1.6 billion for the quarter, above Street estimates and about 23% ahead of last year. US Steel revenue growth over Q2 is likely to be driven by strong volumes for flat-rolled products and a potential increase in the tubular-products business due to increased oil and gas-related activity. Moreover, although the Russian invasion of Ukraine has impacted the steel business, due to rising commodity and energy prices, particularly in Europe (which accounts for 20% of U.S. Steel’s revenue), the company has been able to pass on these rising costs to customers via price increases, protecting its margins.
Currently, at its current market price of about $20 per share, U.S. Steel stock is trading at under 2x consensus earnings of $11 per share. Although cyclical stocks like U.S. Steel typically see lower multiples when the markets project that earnings and revenues are approaching a near-term peak, there are some factors that could help U.S. Steel. The EIA’s lower benchmark oil projections for 2023 and prospects of leniency in China’s Zero-Covid policy after Shanghai’s announcement to end lockdowns, may help demand to a certain extent if China’s industrial output picks up. Moreover, even if there is a downturn in the U.S. economy, indicators do not point to a very deep decline this time around, with household savings rising post the pandemic and banks also remaining well-capitalized. These factors could make U.S. Steel stock worth a look at current levels. We value US Steel at about $35 per share, which is well ahead of the current market price. See our analysis of US Steel Valuation: Is X Stock Expensive Or Cheap? for a closer look at what’s driving our price estimate.
With inflation rising and the Fed raising interest rates, US Steel stock has fallen 20% this year. Can it drop more? See how low can US Steel stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
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