The Potential Impact Of The Reintegration Of U.S. Steel Canada On U.S. Steel’s Stock Price

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U.S. Steel Canada, the Canadian subsidiary of U.S. Steel (NYSE:X), filed for bankruptcy protection in Q3 2014, after reporting operating losses for five consecutive years. [1] U.S. Steel deconsolidated the results of its Canadian subsidiary starting in Q4 2014, since U.S. Steel Canada is undergoing restructuring activities under bankruptcy protection. The deconsolidation of the company’s loss-making Canadian unit significantly boosted the profitability of the company’s U.S. Flat-rolled division, thereby boosting the company’s stock price. However, if the company were to reintegrate its Canadian operations, even with an improvement in operational efficiency, there is likely to be a downward revision in valuation. In this article, we will explore the impact of this scenario on the company’s stock price.

Impact of Reintegration of U.S. Steel Canada

U.S. Steel Canada accounted for 2.2 million tons out of the U.S. Flat-rolled segment’s 9.1 million tons in shipments in the first nine months of 2014. [2] Thus, if U.S. Steel decides to reintegrate its Canadian unit into the U.S. Flat-rolled division post restructuring, it would significantly boost the division’s shipments going forward. However, such an eventuality would depress margins for the division.

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U.S. Steel Canada reported around $200 million worth of operating losses on revenues of approximately $1.4 billion, which translates roughly into an operating margin of -14%. [2] In comparison, the U.S. Flat-rolled segment reported operating income of $462 million on revenues of $9.1 billion, or an operating margin of around 5.1% in the first nine months of 2014. [2] These results of the Flat-rolled division included the results of U.S. Steel Canada. Thus, if the Canadian subsidiary’s results are reintegrated into U.S. Steel’s results, the Flat-rolled division’s margin would revert close to such levels, which are lower compared to current expectations for the division’s margins. Though the restructuring of U.S. Steel Canada would boost the Canadian unit’s margins, the reintegration of U.S. Steel Canada is still expected to depress margins for the U.S. Flat-rolled division.

In order to model this scenario, we have increased the shipment forecasts for the U.S. Flat-rolled division, to account for the integration of U.S. Steel Canada. We have also suitably modified margins for the division, in order to account for the integration of  U.S. Steel Canada, factoring in an operational improvement from restructuring activities. If we factor in these assumptions into our model, our price estimate declines by around 11% from $23.24 to $20.70. Thus if U.S. Steel Canada is reintegrated into U.S. Steel’s operations, a downward revision in valuation could potentially follow.

See our complete analysis for the Reintegration of U.S. Steel Canada scenario here

 

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Notes:
  1. U.S. Steel’s Canada Unit to Seek Bankruptcy Protection, Wall Street Journal []
  2. U.S. Steel’s Q3 2014 10-Q, SEC [] [] []