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Why risk-loving investors should look at U.S. Steel
Main page Opinion, Trading tips

Even though the company's price target range is one of the largest in the S&P 400, Barron's predicts the U.S. Steel Corp to jump 50% or more within the next year. But investors should keep certain risks in mind.

With a price target of the U.S. Steel Corp (NYSE: United States Steel Corporation [X]) being the second most-scattered in the entire S&P 400 Index and varying from $7 to up to $37, betting on this stock feels a lot like gambling. The Pittsburgh-based steel producer has seen its stock growing from the bottom levels of $8 last year to about $27 this July thanks to a steep increase in the steel prices. However, since July, the steel prices have crawled back from their 50% jump and dragged the U.S. Steel stock down to the $16s level.

According to Barron's, this stock should be definitely something to consider for "risk-tolerant" investors next year. To begin with, Chinese steel producers have been the company's and industry's main rivals, preventing U.S. Steel Corp from strengthening its market share. China has become the world's leading steel producer in the past years, producing almost half of all steel in the world. The country has dramatically grown its market share from 13% in 1996 to over 50% today, pushing the U.S. from the top of the steel pedestal. The analysts say that China is currently producing 10 times more steel than the U.S.

Add to this lower prices of the Chinese-produced steel and you will get a recipe for a disaster. But earlier this year, the U.S. Department of Commerce have increased the trade tariffs for China's steel producers to over 500%, making it much harder for them to export their goods to the American market. This gave the American producers a chance to grow their market share in the domestic market, previously dominated by the Chinese producers. Following the hike in tariffs, the price of the U.S. steel has grown from $390 per ton to over $600 this summer and has recently settled at a little over $500. This allowed the U.S. Steel to boost its stock up from $8 to $27 in a matter of few months.

"China is extremely dissatisfied with this decision. China urges the U.S. to strictly abide by World Trade Organization guidelines and correct its mistake as quickly as possible," the Ministry of Commerce said in a statement, as reported by CNN.

In addition to that, the management of the U.S. Steel's CEO Mario Longhi is yet another factor that contributes to the company's predicted strong growth. Leading the company since 2013, Longhi has carried out a strict cost-cutting campaign that yielded over $800 million in savings in 2015. The chief's plan included several layoff rounds that brought the company's headcount down to 20,000, getting rid of more than 9,000 employees over the past years.

According to Barron's, Longhi has been leading his company under strict control and has frequently spoke against the Chinese producers accusing them of breaking the American law by importing their steel relabelled as Vietnamese. He said that there was much more at stake in the Chinese-American argument over steel than just the jobs of the American steel workers. Longhi went as far as to claim that steel production is "a matter of national security", pointing at the importance of the industry for the U.S. economy.

Analysts can't agree

As a result of the tariff hike imposed by the Department of Commerce, the U.S. Steel has entered the path of growth. According to Barron's, Credit Suisse' analyst gives the company a generous $29 price target and predicts its annual yearnings to go as high as $800 by 2018, which is 4 times higher than the current earnings performance of the U.S. Steel. On top of that, the analyst estimates that cash net debt will amount to about $200 million, down from the last year's $2.4 billion.

Likewise, JPMorgan's analyst Michael Gambardella believes that China's steel production is gradually shrinking, what gives U.S. Steel a chance to significantly grow its profits in the upcoming months. Gambardella says that another factor that will contribute to the company's profit growth is the change of the expired supply contracts that were based on the "old" lower steel prices. As soon as U.S. Steel makes new contracts with the suppliers based on the new steel prices, the company's performance will react accordingly. At the company's historic average 5.8x Ebitda, U.S. Steel might reach the ambitious $37 target already by the end of 2017, says the analyst. According to the Chinese General Administration of Customs, the country's export has dropped by 10% YOY this September, what is much higher than the predicted 3% drop, reports CNBC.

These are some expert opinions that predict a "big future" for the previously-struggling stock. However, there is another group of analysts that are not so optimistic about the future performance of U.S. Steel. Macquarie analyst downgraded X stock price target from $20 to $13 whereas The Street's analyst marked U.S. Steel as a "sell". Therefore, even though several leading analysts predict U.S. Steel to have a bright future, the investors should be prepared for the risks that come together with betting on this company. Again, the scattered range of predicted returns going from the lowest of $7 to the highest of $37 is definitely not something to neglect.

U.S. Steel is also part of the SPDR S&P Metals and Mining ETF (US: XME) and makes up approximately 4% of the ETF. XME has been trading lower the past days, trading at $24.43 today down 1%. As of writing, U.S. Steel trades at $16.53.

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