5 Reasons to Like U.S. Steel

by Marc Bastow | August 1, 2012 2:25 pm

It has been a very rough year — OK, several years — for the U.S. steel industry, and few have suffered as much as U.S. Steel (NYSE:X[1]). But every so slightly, it appears things are changing.

The iconic integrated producer of flat-rolled and tubular products has seen its revenues increase over the last three years, and after a $1.41 billion earnings loss debacle in 2009, earnings have improved. Balance sheet woes still are a bit of a worry, but again, not quite as bad as before.

Regardless, the stock has shed nearly 20% this year alone and is off about 45% from last year, and a brutal 77% over the last 5 years, including the dark days in 2009. U.S. Steel is not alone in the pain — sectormates AK Steel (NYSE:AKS[2]) and Steel Dynamics (NASDAQ:STLD[3]) also have struggled under the same conditions.

But despite both its individual struggles and the industry’s hardships, it might be worth taking a look on the brighter side of U.S. Steel. In fact, I can think of five reasons why you should like U.S. Steel right now.

  1. Profitability in flat-rolled segment: Conditions are looking up due to increased demand from the auto industry (although a report released today suggested a slowdown in July[4]). For the first half of 2012, flat-rolled income from operations was $360 million — the best first-half performance since 2008, and a continuation of a trend since 2009. With U.S. automakers starting to see continued improvement in sales — and consumers clearly out there looking for new cars — demand should continue to build.
  2. Profitability in Europe: U.S. Steel managed to forge another profitable quarter, its second in a row, from European operations. That’s no small feat. Continued strong performance by its Eastern European subsidiary U.S. Steel Košice was driven by lower material, energy and maintenance costs. The group improved profitability by $51 million over first-quarter results despite a struggling market. There’s not many companies out there crowing about their progress in Europe. Just saying.
  3. Profitability in general: U.S. Steel just released second-quarter earnings, and while they were less than half of last year’s figures, adjusted figures of 69 cents per share managed to beat Street estimates of 48 cents. More importantly, while $101 million in profit isn’t $222 million in profit, it’s a lot better than the loss U.S. Steel took two years back — and that figure was weighed down as the company paid off some debt.
  4. Improved picture in the tubular segment: The tubular segment generated operating income of $103 million. While the 493,000 tons of steel shipped were below last quarter’s record levels, the figure still is near historically high levels. Average prices still are low and under pressure, but efficiencies in the system and increased oil rig drilling activity in the United States continued at a high levels, and a recent licensing round by the federal government grew record-high bids. In a good way, oil is helping to drive steel.
  5. Financial stability: All thing considered, U.S. Steel is not in the dire circumstance people assume. The company is sitting on just more than $500 million in cash, and it generated just more than $577 million in cash flow in the last full fiscal year. While return on equity is negative, return on assets is 1.9% — not knocking it out of the park, but at least efficient. The company’s 7.7 forward price-to-earnings suggests little faith in growth, but it does mean it’s cheap — and the fact it even HAS a P/E ratio demonstrates an improvement on past years.

There’s one last thing — maybe not a reason to buy, but it’s definitely a reason why I love U.S. Steel: its “American Icon” factor.

I know, I know, this has nothing to do with financials, and you can’t make a living on name or reputation. But U.S. Steel is American business. The company’s founding fathers include names like Andrew Carnegie, John Pierpont (J.P.) Morgan and Charles Schwab. U.S. Steel helped build the country, win at least two wars, and power a living for millions of middle-class families for generations. If nothing else, a tip of the cap is warranted.

Bottom Line

It’s still going to be a long road back for steel, and probably an even longer road for U.S. Steel to claw back the roughly 80% losses it has suffered in the past five years. But if you’re thinking of buying now, you don’t need it to regain everything — you just need it to gain.

And that much, U.S. Steel should be able to do.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. X: http://studio-5.financialcontent.com/investplace/quote?Symbol=X
  2. AKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=AKS
  3. STLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=STLD
  4. although a report released today suggested a slowdown in July: http://money.cnn.com/2012/08/01/news/companies/car-sales/index.htm?iid=HP_LN

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