Inside Wall Street: U.S. Steel Is Springing Back Strongly

Gene Marcial's Inside Wall Street U.S. Steel
Gene Marcial's Inside Wall Street U.S. Steel

Big Steel is finally turning around -- a big surprise to most people on Wall Street. And some investors and avid followers of U.S. Steel (X) are taking note and buying shares of the world's fifth-largest steelmaker.

The budding economic recovery has already done wonders not only for U.S. Steel but for the entire industry. A number of key markets have perked up, most notably autos, appliances and heavy industrial equipment. That means orders have started piling in at U.S. Steel. Construction has yet to snap back, but when it does, analysts feel confident that it would make U.S. Steel an even more attractive long-term play.

U.S. Steel's first-quarter results partly reflect these good tidings, confirming the optimism of the early bulls who bought shares. Indeed, signals indicate that the company is on the road to a solid recovery. "The picture is clearly brightening for U.S. Steel," says Harvey S. Katz, steel industry analyst at investment research firm Value Line. The giant global steel producer is well positioned, he says, to be a key player in promising markets in the U.S. and Europe, and is deftly situated in terms of raw materials and financial resources.

A Sharply Narrower Loss

Analysts see U.S. Steel leading and typifying the industry's advance in the years ahead. They expect it to add capacity as the U.S. economy continues to recover. According to Katz, U.S. Steel and the industry are likely to set "high operating rates, adequate pricing and healthy margins" as demand mounts during the economic rebound.

In this year's first quarter, U.S. Steel impressed analysts when it beat their expectations and narrowed its operating loss to $1.10 a share on a 42% sales increase vs. Street forecasts of a loss of between $1.25 and $1.86 a share. In the first quarter of 2009, the company posted a whopping loss of $3.78 a share. Signs of an upturn in the first quarter were reflected in the 67.5% jump in U.S. Steel's overall shipments from a year ago.

Because of the unexpectedly improved first-quarter results, Standard & Poor's analyst Leo Larkin upgraded his recommendation on U.S. Steel on Apr. 27 -- to a buy from a sell. He also boosted his 12-month price target for the stock, then trading at $58 a share, to $70 from $56.

Larkin's revised price target is based largely on his earnings forecast for 2011 of $6.34 a share (up from an earlier estimate of $5.73) because of a more optimistic outlook for steel prices and profit margins. For 2010, he figures U.S. Steel will earn $2.23 a share. Those numbers are definitely a sharp improvement over 2009's loss of $10.42 a share.

"Bigger and Better Things"

The recession a year ago slammed the steel industry, rolling back U.S. Steel's production in 2009 to 11.7 million tons in North America and 5.1 million tons in Europe, down from 2008's output of 19.2 million and 6.4 million tons, respectively. But things are now looking up.

Said U.S. Steel Chairman and CEO John P. Surma at a recent conference call with analysts: "Operating results have been making a slow and steady recovery since hitting a low point in the first quarter of 2009 -- until this [first] quarter when the benefits of improved utilization rates and selling prices began to be realized in a more significant way."

The brightening results will become more evident as 2010 unfolds, "and bigger and better things are likely in 2011," says Value Line's analyst Katz. He figures that by then, the U.S. and European economies should be recovering in tandem, along with industry fundamentals. In such a scenario, says Katz, U.S. Steel's earnings could rebound to a wide range of $3 to $7 a share, "reflecting the vagaries of the steel industry cycle." Katz argues that with U.S. Steel's considerable earnings power, its profits "could hit $15 to $20 a share on an annual basis within our 2013-2015 projection period."

One of the bears' arguments against the stock is that it just climbed to a 52-week high of $70 a share on Apr. 6, 2010, and then retreated to $58 by Apr. 27. On that day, the overall stock market tumbled, with the Dow Jones industrial average losing more than 200 points. It has dropped more since and closed on Apr. 30 at $54.66, on another bad day for stocks overall as the Dow lost 158.

The bulls contend, however, that the sharp price drop is surely a rare opportunity for investors to buy U.S. Steel's shares -- before they race up again to $70 a share.