U.S Steel Has Opportunity to Lift Profit Margins

| About: United States (X)

U.S. Steel (NYSE:X) can significantly raise its value by focusing on profit margin improvement for its U.S. flat-rolled steel division. U.S. Steel is currently the tenth largest steel producer in the world, with an annual raw steel production capability of nearly 32 million tons. The company competes with international steel giants like ArcelorMittal (NYSE:MT), BaoSteel, Posco (NYSE:PKX), Nippon Steel (OTC:NISTY) and ThyssenKrupp (OTCPK:TYEKF).

We maintain a price estimate of $60.17 for U.S. Steel’s stock, a premium of about 15% to its current market price.

U.S. Flat-Rolled Steel is the Company’s Largest Source of Value …

U.S. Steel’s flat-rolled steel division contributes almost 42% to our estimated stock value for the company. This division represents the company’s sale of flat rolled steel to its customers in the United States, which includes steel plate products used for ship building, construction, large diameter welded pipes and boiler applications, as well as strip products used in automotive body panels and domestic white goods. [1]

U.S. Steel has a competitive advantage over other steel manufacturers in the U.S. due to its long-standing relationship with the biggest players in the automobile industry. Sales to major American automobile companies including GM (NYSE:GM), Ford (NYSE:F) and Chrysler (DCX) constitute almost 20% of the division’s sales.

(Chart created by using Trefis' app)

… But it Can Still Do Better

U.S. Steel, however, does not seem to be putting enough emphasis on improving profitability of this division. We believe that the operating performance of this division is still well below that of its competitors, meaning that there is quite a lot of value that can be unlocked by simply controlling input costs better.

One of the benchmarks for the division’s overall performance is ArcelorMittal’s American flat-carbon steel operations. ArcelorMittal is the world’s largest steel producer, and as the chart above illustrates, its American flat carbon steel operations are holding EBITDA margins in excess of 15%.

In comparison, U.S. Steel’s flat-rolled products division has struggled to achieve 10% EBITDA margin in recent years despite manufacturing and selling similar products. This EBITDA margin trend is illustrated in the chart below.

(Chart created by using Trefis' app)

While ArcelorMittal definitely holds the advantage in economies of scale, we do believe that U.S. Steel has an opportunity to steadily lift its profit margins over the coming years.


  1. About Steel, World Steel Association

Disclosure: None