U.S. Steel: Strong Prospects -- Barron's

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Is This Steel Stock a Steal? by Andrew Bary

Highlighted companies:United States Steel Corp. (NYSE:X), Cleveland-Cliffs Inc. (NYSE:CLF), Nucor Corp. (NYSE:NUE), Mittal Steel Company NV (NYSE:MT)
Summary: United States Steel Corp. (X), the world's sixth-largest steel producer, has been the subject of recent takeover rumors: Its selling points: Large, integrated U.S. operations; low-cost steel mills in central/eastern Europe; vast iron-ore (steel's raw material) mines in Minnesota; debt-free; $8B market cap. The steel industry is in "its best shape in decades," and prices have risen since 2003. Domestic consolidation and higher raw-material costs have eroded China's pricing advantage. Despite a recent run-up of 18% since Oct. 3 (current price $65), U.S. Steel shares still look inexpensive at just 6x 2006 profits (about half of its main rival Nucor Corp. (NUE)), which led a J.P. Morgan analyst to remark that its stock isn't "reflecting the dramatic improvement in their earnings capability over future cycles." Its enterprise value (equity value plus net debt) is about $400 a ton of annual production; the industry leader is valued at over $600/ton. Q2 earnings were $3.22/share up from $2.04 y/y. The company has repurchased 7.7M shares since July 2005 (123M outstanding). Any buyout is likely to be foreign; Nucor, the only U.S. steelmaker with the potential, would face antitrust obstacles. Barron's bottom line: "Deal or no deal, U.S. Steel could be a winner. A buyer might pay $100 a share, and an independent U.S. Steel could top $80 in the next year if it defies the bears and produces ample profits in 2007."
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