The U.S. Steel Industry is Not as Healthy as it Seems

The U.S. steel industry was on the brink of collapse during the heart of the financial crisis. As the U.S. economy recovered in the years since the Great Recession, it seemed entirely plausible that the domestic steel industry would benefit right alongside. While the U.S. steel industry is no longer on the brink of collapse, it still faces a great deal of challenges.

At the same time, if you judged the health of the steel industry solely by steel companies' stock price performances over the last few months, you would come to a vastly different conclusion. Major steel producers based in the United States, including U.S. Steel , and Nucor , have seen their share prices soar over the past few months.

But investors who understand that short-term stock price movements do not necessarily predict future underlying performance have plenty of reasons to be cautious about U.S. steel producers in the months ahead. Instead, here's why you should favor international competitor ArcelorMittal .

Business trends not as good as stock prices imply
Despite what rising stock prices might imply, it's important to keep tabs on the underlying performance of the businesses involved. Investors are not always rational, and there is often a disconnect between a company's stock price and its real business fundamentals. This is exactly what seems to be playing out for the U.S.-based steel companies.

Shares of U.S. Steel are up a whopping 40% just since October 3. However, consider that U.S. Steel's business has deteriorated for much of the year. It recorded a $1.6 billion operating loss through the first nine months of 2013, but booked a $242 million operating profit in the same period in 2012.

Meanwhile, Nucor's core metrics are worsening as well. It is seeing severe pricing weakness, which took its toll on the company's results in 2013. Nucor suffered a 6% drop in average sales price per ton through the first nine months of the year, along with a 5% drop in sales and 14% lower earnings.

Put simply, it does not appear that the over-arching concerns facing the steel industry in the United States have subsided. You wouldn't know it by their share prices, though. At the same time, one international steel producer has seen its business improve recently.

That would be ArcelorMittal, which kept its head above water in the third quarter, and has a much better internal outlook going forward than its American rivals. ArcelorMittal grew earnings before interest, taxes, depreciation, and amortization, or EBITDA, by 24% in the third quarter versus the same quarter in 2012. Going back further, steel production and shipments are both up over the first nine months, which drove its outperformance.

U.S. steel makers' disappointing future outlooks
Unfortunately, questionable recoveries in the markets most important to the U.S. steel industry mean U.S. Steel and Nucor will see considerable challenges in the year ahead. Neither company sees gang-busters growth in store in the near future, mainly because the commercial construction industry in the U.S. is not yet fully healthy.

U.S. Steel isn't likely to show significant progress in the upcoming quarter. Management expects relatively tepid results in its two core segments. Its flat-rolled business should just break-even, and its tubular segment is not likely to grow in the current quarter, year over year. Meanwhile, Nucor warned investors that fourth-quarter earnings are expected to decline as opposed to the same quarter last year, due to planned outages.

By contrast, ArcelorMittal believes it will grow underlying profitability for full year 2013, driven by improving core metrics across the board. Steel shipments are expected to increase 1%-2% for the full year. Iron ore shipments should rise 20%, and the company expects to improve margins due to its cost-savings initiatives.

Conclusion: ArcelorMittal beats its U.S. rivals

Interestingly, ArcelorMittal has actually seen its core underlying business improve in the most recent quarter, implying that its recent stock price gains are much more believable than U.S. Steel's or Nucor's.

While U.S. Steel and Nucor have seen their shares perform strongly in the past few months, investors should not be convinced, due to their ongoing struggles and dour outlooks. At the same time, ArcelorMittal's recent performance and its full-year outlook should give investors some confidence that it is on a smoother road to recovery. 

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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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