Why We’re Raising Our Price Estimate For U.S. Steel To $38
The past few months have witnessed a considerable improvement in the prospects of domestic steel companies. A combination of an improved demand outlook and the impact of regulatory intervention by U.S. trade authorities against unfairly traded steel imports have boosted the fortunes of companies such as U.S. Steel. This has prompted us to revise various estimates in our model for U.S. Steel’s stock price, resulting into a new price estimate for the company.
President Trump has reiterated his commitment to his promise of a $1 trillion overhaul of domestic infrastructure post last year’s presidential election. [1] The implementation of this plan is expected to boost domestic demand for steel going forward. In addition, the imposition of anti-dumping duties on unfairly traded steel imports from countries such as South Korea and China last year by U.S. authorities is expected to lower the competition from these unfairly traded steels for the domestic steel industry. [2] A more level playing field amid robust demand conditions is expected to translate into margin growth for U.S. Steel’s American operations going forward. We have suitably modified our margin forecast for the U.S. flat-rolled steel division to reflect the improved business environment, with our new margin forecast representing a 100 basis point improvement by the end of our forecast period, as compared to our previous forecast.
The improved business environment in North America has been complemented by the success of the company’s cost reduction and efficiency improvement initiatives. The company reported $745 million worth of margin improvement from these initiatives in 2016 and expects to realize around $150 million worth of benefits in 2017. [3] As a result of the company’s successful cost reduction initiatives, we have boosted our margin forecasts for U.S. Steel’s European operations by around 50 basis points by the end of our forecast period.
Lastly, the company has also successfully rationalized capital expenditure in response to weak demand conditions over the past few years, registering a 39% year-over-year decline in spending in 2016. [3] Though the company’s capital expenditure will rise in response to improved demand conditions going forward, we have factored in a lower growth trajectory for the same. Our new estimate represents a 15% decline in spending by the end of our forecast period.
The aforementioned changes to our forecasts have translated into our new $37.82 price estimate for U.S. Steel, which captures the favorable business conditions facing the company going forward.
Have more questions about U.S. Steel? See the links below.
- How Has The Increase In Steel Imports To The U.S. Impacted U.S. Steel’s U.S. Flat-Rolled Steel Operations?
- How Has The Decline In Oil Prices Impacted U.S. Steel’s Tubular Steel Shipments?
- Can U.S. Steel Stock Return To Pre-Inflation Shock Highs?
- What’s Happening With U.S. Steel Stock?
- Will U.S. Steel Stock Continue To Outperform Despite Economic Headwinds?
- 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?
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Notes:- Trump’s $1 Trillion Infrastructure Dream Faces the Same Old Nightmares, Bloomberg [↩]
- US hits China and others with more steep steel duties, CNBC [↩]
- U.S. Steel’s Q4 2016 Earnings Presentation, U.S. Steel Website [↩] [↩]