Why We Are Cutting Our Price Estimate For U.S. Steel Stock

-3.96%
Downside
25.85
Market
24.83
Trefis
X: U.S. Steel logo
X
U.S. Steel

The shares of United States Steel Corporation (NYSE: X) have declined by about 15% year-to-date and remain down by over 45% from their March 2022 highs. While the company’s financial performance over the first half of 2022 has actually been pretty strong, with US Steel revenue and operating profits growing by 32% and 62% year-over-year respectively over the first six months of the year, driven by a surge in steel prices following the Russian invasion of Ukraine, there are multiple factors clouding the outlook for the industry. The U.S. Federal Reserve and other major central banks have been hiking interest rates at an aggressive pace to combat inflation. Late last month, the U.S. central bank raised its benchmark rates yet again by 0.75%, taking the Federal Funds rate to over 3%, from just about 0.25% at the beginning of this year. Higher interest rates are widely expected to result in a hard landing for the U.S. economy, leading to lower demand from key steel consumers such as the automotive and construction industry. There are also concerns about demand from China as its real estate market faces a big downturn. This could also have an impact on the global steel market as China is the world’s largest steel consumer.

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We are reducing our price estimate for U.S. Steel stock to about $24 per share, down from about $35, to account for the weakness in the steel markets. However, our price estimate is still about 20% ahead of the current market price. We think that U.S. Steel looks reasonably well positioned going into a downturn for a couple of reasons. The company’s net debt stands at under $1 billion, which is very manageable even in the current rising interest rate environment. Moreover, even if there is a recession in the U.S., indicators do not point to a very deep decline this time around, with household savings rising post the pandemic, and banks also remaining well-capitalized. U.S. Steel has also less exposure to the European market (it derived about 20% of its sales from Europe, versus over 50% for ArcelorMittal) and this could give it an edge over rivals as energy prices surge amid uncertainty about gas supplies. See our analysis of US Steel Valuation: Is X Stock Expensive Or Cheap? for a closer look at what’s driving our price estimate.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Oct 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 X Return 11% -15% -39%
 S&P 500 Return 6% -21% 69%
 Trefis Multi-Strategy Portfolio 7% -21% 212%

[1] Month-to-date and year-to-date as of 10/6/2022
[2] Cumulative total returns since the end of 2016

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