U.S. Steel (NYSE:X) is a significant company in U.S. history, and despite its recent struggles many investors will choose to put their money into the company purely based on its historical significance. Intelligent Investors know to avoid such speculation by basing their analysis on fundamentals and factual data. Each investment opportunity must be evaluated in order to determine if the company is trading below its intrinsic value. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how U.S. Steel Corp. fares in the ModernGraham valuation model.
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Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
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U.S. Steel is not suitable for either the Defensive Investor or the Enterprising Investor. The company has had a number of negative earnings years recently, which is extremely off-putting for Intelligent Investors. For the Defensive Investor, the lack of earnings stability or growth along with the low current ratio eliminate the company from consideration. For the Enterprising Investor, it is the level of debt relative to current assets in addition to the lack of earnings stability and growth. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should seek out other opportunities by reviewing a list of 5 Outstanding Dow Components. From a valuation perspective, the company fares very poorly in the ModernGraham model due to the shrinking EPSmg (normalized earnings) and the negative EPSmg in the current year. As a result, the company appears to be overvalued at the current time.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on United States Steel Corporation? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in United States Steel Corporation (X) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.