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U.S. Steel (X), A Sturdy Pick For Your Portfolio?

Tuesday, June 13th, 2017

Infrastructure spending has been one area of focus for President Donald Trump. This is also an area that both parties agree must be improved. It is not hard to argue this fact after the American Society of Civil Engineers’ graded the current state of American infrastructure at a D+. This is due to factors such as aging building, bridges, and dams. Trump has discussed a trillion-dollar infrastructure investment plan, which according to steel company, Nucor, could generate an annual incremental demand of 5.0 million tons of steel over the next ten years.

U.S. Steel could be a large benefactor from this investment plan as Donald Trump has promised to use U.S. companies for these infrastructure improvements. U.S. Steel is in the basic materials sector and the steel & iron industry. The company serves a variety of industries including construction, container, appliance and electrical, oil, gas, petrochemical, automotive, and railroad services.

The current price for X is $22.16 and the 52-week range is $14.80 - $41.83.

Looking at the valuation ratios, the current Price/Earnings ratio is not material, while the industry average is 23.51. This is not a strong start as it demonstrates the company has not had positive earnings for the last 12 months of operations. As an investor, you may need to spend some time reading the conference calls and looking at the SEC filings to see why that is the case for this company.

Price/Sales of 0.36 is half the industry average of 0.72. This would be a positive for the company, as investors are getting a great value for the sales. Price/Tangible Book value of 1.91 is more than half the industry average of 4.64, but Price/Cash Flow of 16.26 is well above the industry average of 8.83. Although the company does not have earnings, it is positive that U.S. Steel had positive cash flow over the last 12 months.

U.S. Steel pays a small dividend of 0.91% and since the company has no earnings the dividend payout ratio is not material. In this case, we would need to turn to the cash flow statement to see if the company is generating enough cash to run the business and pay that dividend.

Sales have grown by 16.4% quarter over quarter versus the industry average of 19.7% and by 0.02% year over year versus the industry average of 0.47%. While U.S. Steel trailed the industry average, it was very close to being in line with that industry average. For that reason, we are alright with these numbers. 

EPS growth has been strong as it has grown 55.5% quarter over quarter and 87.4% year over year. In this case, it is important to understand why earnings growth has drastically outpaced sales growth.

Turning to the balance sheet, a current ratio of 1.65 shows the company has enough liquidity to cover its next 12 months of liabilities. A quick ratio of 1.02 is even more impressive as this calculation excludes inventory. It is important to analyze both ratios, because if a company has too much inventory on its balance sheet and a low inventory turnover, inventory control could become a problem. This means old inventory may need to be revalued on the balance sheet or sold at lower prices.

Total Debt/Equity of 139.58% is higher than we like to see, especially with an industry average of 86.96%. Looking at the balance sheet, we can see the company has a little over $3 billion worth of debt. A positive here is the company has been steadily paying down its debt. At the end of 2013, the company had nearly $4 billion worth of debt on the balance sheet. It is important to understand how the company is thinking about this debt, and if it is going to continue and pay it down.

Looking forward to December 2018 and using a forward multiple of 16.5 Estimated GAAP EPS of $2.02 gives us a target sell price of $33.33. Another area of concern is the wide discrepancy between the high and low analyst estimates. The high estimate is $4.34 and the low estimate is $0.39. This wide range makes the average estimate less reliable. Although the target sell price is more than 50% away from the current price and the company has many positives, there are many questions that need to be answered and further research that should be conducted before buying this company. 


Do you have a question or a company you'd like us  to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.


Brent Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8am and Sunday at 5pm on KFMB AM760.  Chase is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8am and Sunday at 5pm on KFMB AM760 as the co-host for the Smart Investing show with his father Brent Wilsey. Information is provided by Reuters.