U.S. Steel Worth $33 Despite Fitch Downgrade
U.S. Steel (NYSE:X) recently saw its Issuer Default Rating (IDR) pushed down to “BB-” from “BB” with a stable outlook by Fitch Ratings. [1] Fitch substantiated the rating downgrade due to an extended period of high financial leverage, high capital expenditures and the weak, albeit improving, steel market. U.S. Steel is an integrated steel producer of flat-rolled and tubular steel products with major production operations in North America and Europe. The company competes with international steel giants like ArcelorMittal (NYSE:MT), Posco (NYSE:PKX) and Nippon Steel. Below we look at this downgrade and assess the outlook for US Steel.
We have a $33 price estimate for U.S. Steel, about 40% ahead of the current market price.
See our complete analysis for U.S. Steel here
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- Is U.S. Steel Set For Tough Q3 Results?
- Why We Are Cutting Our Price Estimate For U.S. Steel Stock
- How Will U.S. Steel Stock Fare In An Uncertain Economy?
Low Capacity Utilization, High Debt Load
US Steel reported $295 million in total reportable segment and other businesses income, significantly higher than the $4 million recorded in last year’s first quarter. However low capacity utilization rates hovering near 8o% in North America are still plaguing the company, which continues to build a large fixed cost base – eating a substantial amount of the company’s free cash flow.
Expected elevated capital expenditures for expansion and efficiency improvements will also cut into free cash flow. Further, the company’s mounting debt load of about $7.9 billion (including pension obligations and net of cash) adds to the company’s worries. The company’s restructuring steps, including the disposal of the unprofitable Serbian business, could provide some much needed relief.
Improved Steel Prices, Low Natural Gas Prices Provide Relief
With steel demand in the U.S. recovering mainly on the back of automotive sales growth, we expect steel prices to improve somewhat throughout the remainder of 2012. This should support U.S. Steel’s revenues for the year, while the use of low-priced natural gas should also allow the company to reduce input costs and boost margins.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Fitch Lowers US Steel Rating, The Wall Street Journal, May 3 2012 [↩]