United States Steel (X) is an integrated steel producer. The company manufactures flat-rolls and tubular products. I’m bullish on the stock. (See Insiders’ Hot Stocks on TipRanks)
Support from Relevant Economic Variables
The macroeconomic outlook for the industry remains robust. By month’s end, U.S. building permits are set to rise by 56.4% since May 2020, signaling strength in the real estate sector.
Furthermore, price-measured demand for maritime shipping-related products has gathered an additional 6.8% since May of this year, and household appliance manufactures’ new orders have risen by 5.3% year-to-date.
Many investors might be worried about price pressure, and although I agree with this narrative regarding Veblen goods such as vehicles, I don’t quite see the same for the other sectors serviced by U.S. Steel.
My reason for this is that disposable income per capita remains elevated at $17,881 versus pre-pandemic levels of $16,444, and the maritime business is set to benefit from further reopening.
Real estate could be correlated to vehicle sales, but the Biden administration’s infrastructure bill could provide support to the sector in the medium term.
Blockbuster Third-Quarter Earnings
U.S. Steel blasted past its Q3 earnings estimates with a $210 million revenue beat and a $0.43 beat on EPS.
Steel shipments increased to 4.12 million tons in the quarter, a 36% increase year-over-year. In addition, capacity utilization also increased with the company’s Flat-Rolled segment rising to 61% from 52% a year ago, and U.S. Steel Europe also managed to swing up to 101% from the 69% a year earlier.
Asked about the quarterly performance, the company’s CEO, David Burritt, said: “Our balance sheet has been transformed and the cash flow generation of the business has us highly confident in our ability to pre-fund organic growth investments,”
Burritt isn’t wrong about the company’s balance sheet and expansion. U.S. steel has an interest coverage ratio of 23.8x, meaning that it can cover its debt with comfort, and any new debt will be for expansionary purposes.
Valuation
The stock remains significantly undervalued, with its P/E ratio of 2.2x trading 87.9% below the sector median. A price-to-sales ratio of 0.39x is also considerably lower than the generally accepted overvalued threshold of 2x.
Probably the most encouraging metric of all is the forward diluted EPS ratio. Analysts anticipate 361.4% in year-over-year growth of the ratio, which is a strong leading indicator of stock appreciation.
Wall Street’s Take
Wall Street is divided on the stock and gives it a Hold consensus rating, based on three Buys, one Hold, and two Sell ratings assigned in the past three months.
The average United States Steel price target of $31.50 implies 19.5% upside potential.
Concluding Thoughts
U.S. Steel stock remains undervalued in my opinion, with economic tailwinds likely to ensure the stock forms a bull run. Analysts remain divided on the stock, but a price target of $31.50 still brings nearly 20% in capital gains with it.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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