Last year was an absolute nightmare for United States Steel Corporation (X). Keep in mind that about $6 billion in revenues evaporated. And yes, X stock plunged from $26 to under $8.
Of course, the company was not alone. Many other steel operators like AK Steel Holding Corporation (AKS), ArcelorMittal SA (ADR) (MT) and Steel Dynamics, Inc. (STLD) also suffered.
The fact is that the global steel industry has been beset with a massive glut, which has tanked prices.
Yet there are still some positive signs, and investors are starting to get interested in the sector. In the case of X stock, it has gained over 50% this year!
So perhaps there is an opportunity here for U.S. Steel? Or should investors still hold off? To see, let’s take a look at the pros and cons for X stock.
X Stock Pros
Carnegie Way: This is the playbook for U.S. Steel, which involves a strong focus on efficiencies as well as quality products. The good news is that the strategy appears to be working. Despite the plunge in revenues in 2015, U.S. Steel was still able to generate adjusted EBITDA of $202 million. But the company has had to take severe actions. After all, there have been substantial layoffs and closures of plants. U.S. Steel has also been focused on finding ways to pump up the cash flows, such as with improving collections, optimizing inventory and paring back on capital expenditures.
Protections: When it comes to the steel industry, a critical factor is tariffs. While these may not be particularly good for consumers, they are helpful with price stability. Besides, tariffs can help prevent dumping from foreign steel producers. So this week, the U.S. steel industry did get some much-needed news on this front. The Department of Commerce announced initial anti-dumping duties for cold-rolled sheet steel against China, Japan, Brazil and other countries. And yes, according to JPMorgan’s Michael Gambardella, X stock should benefit. According to him: “[T]he positive trade rulings especially against the biggest exporter to the U.S. — China — should continue to increase sheet prices off of the recent bottom. In fact, hot-rolled sheet prices in the U.S. bottomed at $364/ton, recently were about $400/ton and just received a $30/ton price hike yesterday.”
Cyclical Stocks: These investments can have gut-wrenching swings, as seen with the performance of X stock. Interestingly enough, the bull move often comes before the industry makes a comeback. Hey, Wall Street likes to anticipate moves, not follow them. For example, during the financial crisis of 2009, X stock went from a low of around $18 to over $50! In other words, gutsy investors can make huge gains if they can effectively time the turnarounds.
U.S. Steel Cons
Macro Factors: U.S. Steel certainly faces several tough headwinds. Of course, there is the massive glut of supply on the global markets. No doubt, a key reason for this is the deceleration of China. And unfortunately, there are few signs that the situation will improve any time soon. But another major factor is the surge in the U.S. dollar, which has made the offerings from U.S. Steel quite pricey. Oh, and the plunge in crude oil has been another major issue. For the most part, this has resulted in a plunge in the demand for tubular products. Keep in mind that operating levels for U.S. Steel facilities are at the lowest levels since 2009.
Debt: Like many companies, U.S. Steel has taken advantage of the historically low interest rates. But then again, this has resulted in massive liabilities on the balance sheet. Consider that — over the next five years — the company will have to pay off about $1.8 billion of its maturing debt. It’s true that current operating levels are sufficient to make the payments. However, if there is a prolonged downturn, U.S. Steel may be in jeopardy. Let’s face it, the company will likely have a hard time obtaining new loans to refinance the debt or pulling off equity offerings.
Legacy Issues: The roots of U.S Steel go back to the 1870s, when America was in the midst of an industrial boom. So while it is impressive that the company has been able to last so long, there are certainly some major issues. After all, it has to deal with its legacy of onerous healthcare and pension benefits as well as aging plants. In fact, U.S. Steel may be at a competitive disadvantage because it relies on expensive blast furnaces. The company’s rivals have much more modern systems, such as direct iron reduction, EAF production, oxygen-coal injection and molten oxide electrolysis.
Bottom Line on U.S. Steel Stock
The steel industry still has some bright spots. Consider that there continues to be robust growth in categories like autos and housing.
But of course, the big issue is with China, which may see lackluster demand for steel for some time. But then again, U.S. Steel should get some help with the imposition of tariffs.
Despite all this, the stock price has already staged a big move. Actually, a big part of this has likely been from a short squeeze. Basically, about 39% of the float is in short positions.
OK then, should you buy X stock? Well, not yet. Given the volatility, there’s a good chance you can wait and get a better price on this one.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
