US Steel: Solid as They Come

With all the talk of recession, of manipulation in the financial markets, of hedge funds short selling the brokers and of oil hovering around all time highs, sometimes it seems that investors get too caught up in the fast paced world of Wall Street. Sometimes people forget about the "old-timers," the companies that are responsible for making Wall Street what it is today. Companies that saw the Great Depression come and go, saw two world wars pass and saw times when titans like J. Pierpont Morgan, Andrew Carnegie, Charles Schwab, and so many other notables ruled the Street.

Perhaps I'm just being a little nostalgic for a simpler, more gentlemanly time, but it just seems like today's Wall Street players, people like Vikram Pandit, Jamie Dimon, Lloyd Blankfein and Jeffrey Immelt can't quite stand up to the caliber of their predecessors. I'm not doubting the intelligence of these individuals nor do I mean to diminish their accomplishments, but what I am saying is that I think they're caught up in a Wall Street that just over-complicates things.

Take for example, US Steel (X) in the year 2008. In a year that has seen all of the major indices fall into bear market territory, US Steel has seen its shares rise 28% year to date. Yet no one on Wall Street seems to notice. I never hear Jim Cramer dedicate a segment to US Steel and the Wall Street Journal has given more attention to the crumbling airline stocks than they have to a perennial winner like US Steel. Why is this?

I think the answer is simple really. US Steel just isn't very "sexy" by today's Wall Street standards. They don't engage in transactions that require an accountant, an engineer and divine intervention to value. You never really hear them griping about short sellers manipulating their stocks and you don't see them taking their excess capital to the NYMEX to speculate on crude oil. No, US Steel focuses on one thing. It is the same thing that they have focused on (minus that brief 20 year period when they owned Marathon Oil) for their entire century plus of existence. That is producing and selling steel.

There was a time, though, when US Steel was the "sexiest" thing on Wall Street. Incorporated on February 25, 1901 with the efforts of J.P. Morgan, Elbert H. Gary and Andrew Carnegie, US Steel was the world's first ever IPO in excess of 1 billion dollars. It was so massive and so revolutionary that for years, Wall Street simply referred to it as "the Corporation". The great Charles Schwab was the company's first president (he would leave in later years to run Bethlehem Steel).

US Steel has had a history of resilience. They have fought off the anti-trust efforts of the federal government, survived the difficulties of the Great Depression, withstood countless labor disputes and even repelled an effort by President Harry Truman to nationalize their steel mills.

US Steel is also an American icon. They have lent elements of their logo (the three multi-colored hypocycloids) to the Pittsburgh Steelers NFL team and in 1906 they built the city of Gary, Indiana (and still operate the largest steel mill in the northern hemisphere in Gary).

But even with such a rich history, Wall Street still doesn't even seem to recognize US Steel now. They don't make extraordinary profits like some on Wall Street would like, but they do make a steady flow of profit. Their share price has risen this year which could easily be attributed to the high worldwide demand for steel (which isn't likely to decrease any time soon), but the bottom line is that US Steel knows the steel industry better than anyone else (that's bound to happen when you've been in the same business for a century).

It is likely that their current CEO John Surma has documents in his file cabinet signed by Charles Schwab, Andrew Carnegie and the incomparable J. Pierpont Morgan. These documents are probably lost to time though just like the once great company that was known by all simply as "the Corporation".

I can't ignore the fact that US Steel is still profitable and that they focus simply on producing steel. Even the subsidiary companies that they own now are involved in the production of basic materials needed to produce steel or in the distribution of steel. This company has experience in its industry that you just can't find anywhere else.

Maybe it's time that I stopped feeling so nostalgic and just put US Steel out of my mind like Wall Street seems to have done. But when I ask myself "if the likes of J.P. Morgan were here today where would he be putting his money?" The answer that I invariably come to is that Morgan would be ashamed of Wall Street and its CDO's and of the irresponsible lending that led to this current crisis (even though I think he would be proud of the way Jamie Dimon "rescued" Bear Stearns) and he would have his money in none other than US Steel. And J.P. Morgan certainly wasn't wrong all that often. Something to step back and think about for all those in the fast paced world of Wall Street.

Comments

[CFROI Champ]

Jim Cramer did have a segment devoted to US Steel. He had the CEO come to the TV show too.

[jjs]

Cramer has been a bull on steel. He had the Nucor CEO on last night and did a feature with the US Steel CEO as a guest during the show from Penn State. Note X was at 125 at the time.

[doubleeagle]

US Steel should have a $100 price target on it. World demand is slowing. With its recent run up this year, I think this presents a short opportunity down to the low 100 hundred levels.

[Rocknrolllegend193]

Good article, but I just wanna correct one thing: X is us 28% since July 19, 2007, not year to date. It's up 18% YTD.

[Rocknrolllegend193]

Up, not us. Sorry about that.

[sunrises]

Steel is a non-perishable and resilient tough-metal. Take it as pull-backs & watch it's bounce back.

Good luck!

[D. Yaros]

Nice to hear somone say something good about "the Corporation" for a change!

Dave's Den provides a good insight into the U.S. Steel-Gary Works operations and steel making in general, for all with an interest.

[D. Yaros]

Since the Dave's Den link did not print, here it is:

GDYNets.WebNG.com

[bushwachergary]

Lovely nostalgic story with the author bemoaning the lack of WS coverage, but I recall a WSJ article almost a year highlighting "The Balkanization" of the steel industry; consolidation through M&A and it's likely effects.

Fewer suppliers bring to mind an oligopoly and, through discipline control the supply side to match (or be less than) the demand side, pressuring price upward... think OPEC.

Steel is a good investment for those reasons, and not only do I not buy waning global demand (China & India are en fuego); but even if the growth were to temper, the global steel oligopoly will manage prices through their disciplined supply side control

You cannot look at NA in isolation, thinking recessionary impact, etc because; the global situation (NA steel exports, weak US$ causing no foreign steel imports) pressures US pricing upward even in the face of a continental recession.

[AmesTiedeman]

These steel stocks had their major moves. Time to look at financials that have been killed. Why buy stocks that have gone up 10 fold when you can buy a BAC or WFC at these levels? Buy low and sell high. Right?

[InglefoXinvesting]

I just want to clarify one thing: Yes, X is only up 18% year to date now, but when this article was originally written and posted to my blog (July 15) it was in fact up 28% year to date. Yes, it has shed those 10 percentage points in just four days.
But thanks for keeping me on my toes there Rocknrollleg
end193...you had me worried about my numbers for a second.

[jsudds]

hey doubleeagle! Where are you getting your info about world steel demand slowing. You are dead wrong! I happen to work for ussteel and the demand worldwide is so strong it is outstripping supply, which is giving our company great pricing power. We will report massive earinings this quarter and upward guidance for the next quarter. I can't give you any more detail than that, but go ahead and put your money in these bankrupt banks. You people that think these banks are going to turn things around soon because analysts were off on there estimates are blind. Go look at analysts estimates. Historically they are always exaggerated to the down side if a sector is doing poorly.

[71743]

World demand is anything but slowing. The steel industry is in a perfect storm as in the 50's. Difference between now and then is that during that time, we were the only country that could produce steel needed for the rest of the world. Now, while USA is 5% of the world population and 25% of worlds energy consumption because we live well, developing countries have developed a middle class where they like the same things. Rice bowls are being replaced with Steak and potatoe dinners with 400 million people in India, 1.5 billion people in China. We have the food the world needs and the dollar is weak. Farmers are paying 100% more for fertilizer and seed but it is offset by a tripling in bean and corn prices as we feed the world.

There are 200 live orders on the books now for deep water offshore oil rigs and it takes 50,000 tons of steel to make 1. That is 10 million tons per yr and the USA only produces 100 million tons with all mills combined. That is only one segment. The supposed savior is the wind towers going up like crazy. Each one uses 100 tons of plate and the 665 that Boone Pickens just ordered will take 6 yrs to build and put in place that is 665,000 tons and will only generate enough juice to electrify the city of Ft Worth. Oil, Coal, Natural Gas, Minerals to make steel, alloys to produce ultra high strength steel will be needed for yrs to come as other countries need energy and equipment to try to have what we have and it will take them 70 yrs to do it. Gentlemen, it is going to last. Population and the taste of independence and freedom by others demand it. The only thing that will slow it down will be a 1930 depression in China and they are in the yr 1890 (USA analogy) They have cities to build, people to feed and our equipment and technology to do it. We did the same thing for Japan after the war and they are doing well. Only difference is they don't have a competing military that will grow along with their GDP. Just like ours.