U.S. Steel: Buy X Stock on the Upswing

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For 113-year-old U.S. Steel (X), the past few years haven’t exactly been too kind for investors. The firm has battled issues including higher costs and high debt to falling demand for its core products, and in turn, X stock shares have suffered. In fact, U.S. Steel is worth just a quarter of what it was before the 2008-09 financial crisis and market drop.

U.S. steel X stockBut with today’s announcement, U.S. Steel really might have gotten some of its mojo back.

Shares of X stock are up some 11% as of this writing, continuing a 50%-plus year-to-date advance. So what gives? Why the pop?

And perhaps more importantly … is it finally time for investors to make space in their portfolios for U.S. Steel?

U.S. Steel Is Lightening the Load

U.S. Steel faces a multitude of issues, the biggest of which has be to its high cost structure and higher debt. X still operates many traditional larger format steel operations; however, mini-mill operators like Nucor (NUE) essentially have been able to react to market conditions quicker and more nimbly than X. That’s a big issue considering how wonky the global steel market has been over the past few years.

The higher costs associated with U.S. Steel’s mills have produced losses, and in turn, X has racked up some hefty debts. But it seems U.S. Steel has begun to take this issue seriously by unveiling a plan to eliminate debt and restructure its core steel business.

U.S. Steel announced late last night that its Canadian subsidiary, SteelCo, was being put into bankruptcy protection. Since buying the unit in 2007, U.S. Steel has had numerous troubles getting it to be a real working entity. The business has been wrought with labor disputes and lawsuits. As a result, that unit has posted operating losses of roughly $2.4 billion during the past five years.

However, with the bankruptcy filing, the Canadian unit’s results will no longer be included in U.S. Steel’s financial statements. Moreover, it will wipe between $3.52 billion and $3.9 billion worth of debt off of U.S. Steel’s balance sheet.

That’s one part of the good news for X stock holders.

The second piece is that U.S. Steel is planning on scrapping (no pun intended) several ambitious ventures. X is now canceling more than $800 million worth of expansion projects, including an iron ore pellet operation in Minnesota as well as additional investments into a carbon alloy facility at Gary, Indiana. The Gary project was seen as a way for U.S. Steel to gain access to more high-value steel products dominated by firms like Kennametal (KMT), while the iron ore was being used as way to secure cheap raw materials.

The decision to cancel these projects can be seen as U.S. Steel returning to its original rolled and pressed steel roots.

Buy U.S. Steel Stock

The market seems to like U.S. Steel’s recent decisions to restructure, and regular retail investors should like them as well.

For its latest earnings report, U.S. Steel managed to show significant cash flow and earnings improvements. Cash flows jumped nearly 420% to $783 million, and its net loss was just 12 cents per share — that’s huge considering U.S. Steel lost $11.68 per share for all of 2013. Better yet, analysts expect X to make $2.13 per share in profits this year.

And that number doesn’t even factor in the recent bankruptcy and canceled expansion plans. These plans — along with stable market conditions and the improving performance at its mills — have U.S. Steel projecting that third-quarter earnings will trump what’s expected.

Shares of X stock aren’t particularly cheap at a forward P/E of 17. However, given just how successful the firm’s turnaround plans have been so far, U.S. stock still could be a bargain once you also consider the bankruptcy plans. Already, many investment banks have upped their price targets for X stock to the $55 to $58 range. That’s about 30% higher than today’s post-jump price.

While Nucor remains the steel king, U.S. Steel seems to have figured out what works. For investors looking for an interesting turnaround play, X stock seems like a great bet.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/us-steel-x-stock-nue-kmt/.

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