Why We’ve Revised Our Price Estimate For U.S. Steel to $38

With the new U.S. tax law coming into effect, there has been a recent surge in the U.S. stock market largely due to a favorable impact seen on the valuation of companies operating in the U.S. The same reasoning has led us to revise our price estimate for U.S. Steel to $38.

As per the new tax bill, the corporate tax rate in the U.S. will be lowered to 21% from the existing rate of 35%. U.S. Steel has a considerable amount of tax carry forwards as a result of negative income realized in the past two years largely due to a downturn seen in commodity prices. We had previously estimated the company’s effective tax rate to gradually converge with the statutory tax rate of 35% over our forecast horizon. However, the recent change in the statutory tax rate from 35% to 21% has led us to lower our long term estimate of the company’s effective tax rate to 21%.

A fall in the tax rate lowers the tax burden on the company and enhances its net income and subsequently its free cash flow. Our price estimate for U.S. Steel is based on a discounted cash flow (DCF) model and hence, with an increase in the estimate of future free cash flow,  we have revised our price estimate of U.S. Steel to $38. We have created an interactive model that details how changes in effective tax rates have impacted the valuation of  U.S. Steel.

Additionally, we expect President Trump’s decision on the ongoing investigation pertaining to section 232 to have a significant impact on U.S. Steel’s valuation. With the U.S. Commerce Department having sent its final results of its probe to the President, we await to see if Trump’s final decision would remain favorable to the U.S. steel industry in the upcoming year.

Have more questions about U.S. Steel? See the links below.

• U.S. Steel: The Year in Review
• OPEC’s Extension of Output Cuts Would Remain Beneficial for U.S. Steel

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