We maintain our Neutral recommendation on U.S. Steel Corp. (X), which signifies that the stock will perform mostly in line with the broader market. U.S. Steel’s fourth-quarter results suffered due to weak price realization and below optimal utilization rates. However, U.S. Steel’s operating results are beginning to reflect the benefits of the gradual economic recovery in North America and Europe.
The company also benefits from its focus on value-added products such as cold-rolled and coated carbon steel. We favor U.S. Steel’s leverage to rising steel prices and demand and believe it offers a good opportunity. Its vertical integration into iron ore and attractively priced coking coal contracts for 2011 in the US, combined with higher realized prices beyond 1Q11, should be strong earnings drivers for 2Q11 and 3Q11.
U.S. Steel has significant leverage to improving prices and volumes. The company benefits from its focus on value-added products such as cold-rolled and coated carbon steel, which are used in auto, appliances, electrical and containers, as well as oil and gas industries. Its peers, such as Nucor Corporation(NUE) focus on core steel products. At current levels, we do not expect a downside in the stock price.
To enhance liquidity, U.S. Steel has undertaken a number of actions. During 2010, the company completed an offering of $600 million of senior notes and entered into a €200 million three-year revolving unsecured credit facility to replace its three-year €200 million credit facility.
The company contributed $140 million to the defined benefit pension plan and refinanced $89 million of Environmental Revenue Bonds (ERBs) extending their maturity date from 2011 to 2026. Moreover, it also entered into a loan agreement in connection with the issuance and sale by the Lorain County Port Authority of $70 million of Lorain County Port Authority Recovery Zone Facility. As of December 31, 2010, total liquidity came in at $2.1 billion.
However, U.S. Steel expects weak operating results in the near term, largely due to a decline in shipping and production volumes for the company’s Flat-rolled segment, reflecting slower order rates, primarily from spot market customers.
The company’s Flat-rolled business is expected to continue facing lower trade and inter-segment shipments, as well as lower production volumes and increased costs for raw materials and energy.
Average realized prices are expected to remain flat with a decline in spot market prices, partially offset by increased prices for recently negotiated contracts. Furthermore, the flat-rolled steel market in Europe has witnessed higher imports in the last couple of years. Higher steel imports in the European market negatively affected market prices and demand for steel domestically.
The company has idled the blast furnace at U.S. Steel Siberia, expecting reduced shipments due to lower demand from spot market customers and normal seasonal variations. The segment is also expected to witness higher raw material costs.
The company competes with international steel giants like ArcelorMittal (MT) BaoSteel, POSCO(PKX), Nippon Steel Corp. and ThyssenKrupp.
We maintain our Neutral recommendation on U.S. Steel. Currently, it holds a Zacks # 2 Rank (Buy) on its stock.
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