United States Steel: Undervalued At Current Levels

Mar. 1.12 | About: United States (X)

United States Steel (NYSE:X) is one of the handful of steel stocks that still hasn't come close to getting back to its pre-credit crises price levels. Taking a look back, X hit a high of over $180 a share in mid-2008 before falling below $20 a share in early 2009. The highest it has been since then is just over $60 a share and now it is down in the $27 level. The steel market is still not on solid footing despite the economic conditions slowly getting better. However, the steel market should continue to improve as conditions improve.

The stock here offers a good opportunity, especially on a risk/reward basis. The valuation metrics in unison all suggest that the stock is undervalued here. If the steel market gets going, the stock has the potential to really take off. Last decade, the stock posted over an 18x rise from its lows of below $10 a share in 2003. You can take a further look at the valuation metrics below.

Valuation: United States Steel's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective 5 year averages. United States Steel's current P/B ratio is 1.2 and it has averaged 1.7 over the past 5 years with a high of 3.4 and low of 0.5. United States Steel's current P/S ratio is 0.2 and it has averaged 0.5 over the past 5 years with a high of 1 and low of 0.1.

Price Target: The consensus price target for the analysts who follow United States Steel is $35. That is upside of 29% from today's stock price of $27.22 and suggests that the stock is undervalued and has room to run.

Forward Valuation: United States Steel is currently trading at about $27 a share with analysts expecting EPS of $3.97 next year, an earnings increase of 42% y/y, for a forward P/E ratio of 6.9. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. AK Steel (NYSE:AKS) is currently trading at about $8 a share with analysts expecting EPS of $1.33 next year, an earnings increase of 75% y/y, for a forward P/E ratio of 6.

Nucor (NYSE:NUE) is currently trading at about $44 a share with analysts expecting EPS of $4.07 next year, an earnings increase of 29% y/y, for a forward P/E ratio of 10.7. Arcelor Mittal (NYSE:MT) is currently trading at about $21 a share with analysts expecting EPS of $3.4 next year, an earnings increase of 55% y/y, for a forward P/E ratio of 6.2. The mean forward P/E of United States Steel's competitors is 7.6 which suggests that United States Steel is undervalued relative to its publically traded competitors.

Earnings Estimates: United States Steel has beat EPS estimates 1 times in the past 4 quarters. The company's EPS figures have come in between -79 cents and 20 cents from consensus estimates or about -213.5% to 38.5% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.

Price Action: United States Steel is down 51.5% over the past year, underperforming the S&P 500, which is up 6.5%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $31.36 and above its 200 day moving average, which sits at $28.19.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.