With disappointing global economic growth and skepticism over industrial production, steel producers remain high-risk. Even still, they have generated tremendous returns of late. In my earlier article here, I argued that ArcelorMittal (MT) would outperform both U.S. Steel (X) and Nucor (NUE). It soared by 28.1% while U.S. Steel and Nucor still appreciated by a respectable 17.2% and 14.7%. The Dow Jones over this same time period gained only 5.5%.
From a multiples perspective, U.S. Steel is cheaper than Nucor. It trades at 8x forward earnings while Nucor trades at a respective 18.5x and 11.2x past and forward earnings. Part of the reason that it has greater upside is due to the fact that it makes more exaggerated swings based on economic output with 140% greater volatility than the broader versus 10% for Nucor.
On the fourth quarter earnings call, U.S. Steel's CEO, John Surma, noted a loss:
"Earlier today, we reported a fourth quarter net loss of $226 million or $1.57 per diluted share on net sales of $4.8 billion and shipments of 5.4 million tons. Excluding the effects of foreign currency accounting losses related to the re-measurement of an inter-company loan and an environmental remediation charge, our adjusted net loss was $164 million as compared to an adjusted net loss of $227 million in the fourth quarter of last year. Our adjusted loss per share of $1.14 was a $0.44 per share improvement over the fourth quarter of 2010."
The firm has faced margin pressure mostly due to how its operating structure is dependent on the sector producing near full capacity. While this makes U.S. Steel particularly risky among steel producers, it also allows for it to reap a substantial upside with improving macro trends. At the same time, management has done a stellar job to mitigate risk. The firm has constrained exposure to coking coal, which may have otherwise been the source of meaningful inflationary pressure. It has further diversified in the auto market as the construction market remains weak.
Consensus estimates for U.S. Steel's EPS forecast are that it will turn positive at $2.83 in 2012 and then grow by 37.1% and 17.8% in the following two years. Of the 18 revisions to estimates, 14 have gone up for an impressive net change of 11%. Assuming a multiple of 14x and a conservative 2013 EPS of $3.79, the rough intrinsic value of the stock is $54.06, implying significant upside.
Nucor similarly has attractive upside with the bar set low. The S&P anticipates that spending for non-residential construction will rise by 1.7% in 2012, decelerating off a 5.7% rise in 2011. Fourth quarter results, however, were strong with adjusted EPS of $0.37 and EBITDA well ahead of expectations at $411M. ROE is further expected to rise by 430 bps to around 15.2% in 2013. Greater spending at the Louisiana DRI project and greater scale at the South Carolina, Tennessee and Nebraska projects further showcase management's confidence about the fundamentals and future demand.
Consensus estimates for Nucor's EPS forecast are that it will grow by 33.1% to $3.18 in 2012 and then by 26.7% and 15.6% in the following two years. Modeling a CAGR of 24.9% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $58.18, implying 28.1% upside.