Should You Bet On United States Steel's Turnaround?

| About: United States (X)


United States Steel has disappointed investors by reporting a disastrous performance despite an increase in steel prices last year.

But U.S. Steel can be expected to bounce back on the back of improvement in the end markets.

U.S. Steel is also looking to reduce costs by using electric arc furnaces and other strategies.

Steelmaker United States Steel (NYSE:X) has had a torrid time as far as its financial performance is concerned. Still, the company's shares are up 40% in the last one year, outperforming peer Nucor (NYSE:NUE) by a wide margin. But in 2014, investors' hopes of a turnaround at U.S. Steel came down crashing after the company's disastrous fourth-quarter results. But is there a turnaround in sight?

Increasing losses and weak demand

U.S. Steel's net loss widened in the last quarter as it grew to $122 million from $50 million in the year-ago quarter. This was despite an increase in steel prices in the U.S. in 2013. So, while investors were expecting a positive performance, their hopes were shattered as U.S. Steel plunged downwards.

In addition, U.S. Steel's revenue declined year over year to $4.27 billion from last year's $4.49 billion. In comparison, peer Nucor saw a 10% rise in revenue in the last reported quarter, along with a jump in net income. Hence, it is clear that U.S. Steel is not finding much demand, and investors need to closely scrutinize the company's turnaround efforts.

Positives that you can't ignore

U.S Steel is facing troubled times for quite some time now. Its new CEO, Mario Longhi, will have a tough time ahead, but he has started taking corrective measures to bring the company back on track. In spite of negative market sentiments, management is positive and is trying to present a better picture by saying that "overall market sentiment is not as pessimistic as it was a year ago."

U.S. Steel is counting on an improvement in the industrial equipment market, which is supported by automotive growth. The auto sector put in a strong performance in 2013 with 15.6 million units sold, and is expected to perform even better in 2014 with projected sales of 16 million units. Along with that, the service center industry is also better positioned than last year in both Canada and the U.S. Growth momentum is also seen in the construction industry, as construction square footage was up 28% in 2013 from 2011.

Apart from the U.S, Europe also seems to be on the recovery track, with a boom seen in the manufacturing sector at the end of 2013. Eurozone growth was led by the Netherlands, Germany, Ireland, and Italy. It is expected that economic activity will improve in the first half of 2014, with the gradual shift from external to domestic demand. But, Europe will remain subdued for U.S. Steel as the benefit of increased prices will be offset by increase in raw material costs, led by iron ore and other operating costs.

U.S. Steel is slightly optimistic for the near term, as it expects flat-rolled segment income to increase due to higher prices and shipments, backed by reduced repairs and maintenance costs. The increase price is expected due to higher contract end spot market prices and improving end user demand. Also, repairs and maintenance costs would decrease due to completion of its projects at the Gary Works and Fairfield Works manufacturing plants.

Moves to improve efficiency

U.S. Steel is trying its best to turn around, and reducing costs will certainly help in this regard. Last year, it had acquired the assets of the former RG Steel plant at Sparrows Point. Its caster installation process is underway and this would complement the acquisition. U.S. Steel has also received permission to expand its Mintek Mine boundary by about 400 acres. This will allow it to mine more of its existing reserves and generate value from existing assets.

Also, U.S. Steel has planned to shift from traditional blast furnaces to new electric arc furnaces. A blast furnace makes steel by melting iron ore, which was expensive to maintain and turn on and off. But in an electric arc furnace, Steel is made by melting shredded up automobiles, refrigerators, and other forms of scrap. It can be started and stopped without incurring excessive costs, and it helps margins since scrap material is easy to obtain.


Looking at these propositions, U.S. Steel's prospects seem promising. Although it is currently running at losses, its forward P/E looks impressive at 12.3. Over the last five years, U.S. Steel's losses have growth at a CAGR of almost 40%, but analysts expect that this metric will turn around and the company will report annual growth of 6.50% over the next five years. So, for investors who are looking to invest in a turnaround opportunity, U.S. Steel looks like a solid bet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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