U.S. Steel’s stock (NYSE: X) saw a drop of 75% of shareholder wealth in the last 3 years, with its stock price dropping from $32 at the end of 2016 to $8 as of 19th May 2020. What’s surprising is that during the same period US Steel’s revenues registered a growth of 28%. Our interactive dashboard Why Is There A Mismatch In The Rate At Which United States Steel’s Revenues And Stock Price Have Changed? gives a detailed picture of how stock and revenue moved for the company over recent years.
But how was such a massive drop in stock price possible when US Steel’s revenues increased by $2.5 billion or 28% between 2016 and 2019. Well, there is always a reason – it’s earnings: profits earned after all the expenses and taxes, and negative free cash flow. Turns out US Steel’s earnings margins (profits as a % of revenue) increased from -4.9% in 2016 to 8.7% in 2018, after which it crashed to -5.5% in 2019, lower than the 2016 level. How did US Steel see such a sharp deterioration in profitability in 2019? Dive into our interactive dashboard on US Steel’s expenses for the answer.
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It was a two-fold effect – a drop in global steel prices and increased capital expenditure. The global steel prices declined in 2019 on the back of US-China trade war which led to a fear of lower economic growth and thus lower demand for steel. Drop in price realization led to US Steel shedding $1.3 billion in revenue, when total revenue fell to $11.5 billion in 2019. However, the cost of production did not see a corresponding drop as the price of the primary raw material (iron ore) remained high throughout the year due to supply constraints. This. in fact, led to increase in cost per ton, leading to an operating loss. Combination of these factors (over 2016-2019): revenues rising by 28% and margins dropping to -5.5% meant earnings per share (EPS) declined from -$2.81 in 2016 to -$3.67 in 2019.
Additionally, during such a difficult time, US Steel is burning a lot more cash than its peers. The company’s flat-rolled segment asset revitalization program, that aims to increase productivity and reduce cost in the long term, has led to a planned outage at its Great Lakes Works facility. The $2 billion program is expected to add $275-$375 million to the company’s EBITDA annually in the long term, but is eating up a lot of cash currently. US Steel’s free cash flow decreased drastically from about $450 million in 2016 to -$470 in 2019, reflecting a net cash outflow. At the same time, the company’s cash balance halved from $1.5 billion to $750 million. The market is clearly not impressed, which can be seen in the stock trend over the recent past.
The market seems to have further lowered its near-term outlook for US Steel due to the ongoing crisis. The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The steel demand from industry players affects global steel price levels, in turn impacting the company’s price realization for its products. Lower demand from construction and automobile players, has led to a drop in global steel prices recently, which had already seen a drop due to the ongoing US-China trade war. Additionally, with the outbreak and spread of coronavirus expected to lead to a further slowdown in economic activity and demand, steel prices are expected to remain under pressure in the near term. Further, expectations of lower output is also reflected in the price drop, with US raw steel capacity utilization for the week ending 16th May 2020 being 53.7%, significantly lower than the 82% utilization in the beginning of 2020. Thus, it is a challenging time for the steel industry as a whole, but US Steel has particularly been punished by the market for burning cash at this difficult time.
As per US Steel Valuation by Trefis, we have a fair price estimate of $6 for the company’s stock, lower than its current market price of $8.