When Will This Giant Make a Comeback?

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U.S. Steel Corporation (NYSE: X) is the largest domestically-owned integrated steel producer in the U.S., with major production operations in North America and Central Europe.  On the Jan. 29 the company released its 4Q 2012 earnings. The company reported a net loss of $50 million, EPS of $0.35 on revenues of $4.5 billion, and shipments of 5.2 million tons. Though company’s operating profits were lower than the previous three quarters,  while Tabular and Flat-rolled European segments remained positive in the latest quarter.

Flat-Rolled Segment

The Flat-Rolled segment reported positive results for the very first time in almost 5 years. The operating profits increased to $11 million in the fourth quarter; though the operating income increased $83 million from 4Q2011, it decreased from 3Q 2012. The core reason behind this was low prices and high energy costs. However, completion of major projects in 2012 made sure that the fuel utilization at plants was close to 90%. The company saw a strong demand from the automotive sector, but imports continued to hurt prices and shipments levels.

Tabular Segment

In the Tabular segment, operating income was $32 million, significantly lower than the third quarter amid low shipments and drilling activity. The Tabular segment shipped 1.9 million tons in 2012, which were comprised of a record level of premium alloy products.

The U.S. rig counts stood at 1,763 at the end of 2012 as opposed to 2,000 rigs in January, 2012. The average weekly rig count in 2012 was 40 rigs more than 2011. This resulted in a record number of oil country tabular goods (0CTB) consumed in 2012. Despite the fact that the U.S. had a healthy drilling activity in the year, imports constituted more than 50% of OCTB and line pipe segments.

The Rest of The Steel Industry

Steel companies have been facing tough competition from the aluminum industry for body space in the automotive sector. As the pressure increases on the automotive sector to meet the Corporate Average Fuel Requirement (CAFE) standards, the demand for light weight steel / aluminum is on the rise. As a result, the U.S. Steel and Carpenter Technology have recently collaborated in order to develop a new high strength / light weight steel for the automotive sector.

U.S. Steel’s major rival, Nucor Corporation (NYSE: NUE), beat its estimates and reported an EPS of $0.45 (analysts had estimated an EPS of $0.31). The reason behind this was better operating incomes at its plate, sheet, and beam mills. Cash from operating activities increased to $1.2 billion from last year’s cash flow of $1 billion. According to the company, the operating cash flow in the downturn from 2009 to 2012 was more than double the cash generated during the previous downturn from 2001 to 2003. Nucor is currently trading at a forward P/E (1yr) of 12.11x and has a PEG of 2.30. Moreover, it has a mean recommendation of 2.2 on the sell side which makes it one of the top buys in the steel industry.

One of the other major players in the U.S. steel industry, AK Steel Holding (NYSE: AKS), also reported its earnings for 4Q 2012 on Jan. 29. The company met its revenues expectations of $1.42 billion but beat its earnings expectations of -$0.34 by reporting an EPS of -$0.30. Gross margin was 4.9%, 0.32% better than the previous year’s quarter, while the operating margin was -12.4%, 0.34% lower than the previous year’s quarter. The company is trading at a forward P/E (1yr) of 8.18x and has a mean recommendation of 3.1 on the sell side. This shows that AK Steel isn’t that attractive at this point in time.

Conclusion

High raw material costs, low rig counts, low market prices, and high volume of imports have been the culprits behind the lagging U.S. steel industry. The million dollar question is that would it remain the same in 2013 and 2014? The answer might well be “no.” In 2013, steel prices are expected to remain low but higher shipments and low raw material costs would compensate for it to some extent. Having said this, the rig counts are also expected to grow significantly in the years ahead. Moreover, U.S. Steel has locked in met coal at a price almost 20% lower than in 2012. However, because of high level of inventories at this moment, it won’t see its substantial benefit until 3Q2013. Moreover, the recent collaboration of U.S. Steel with Carpenter Technology is all set to increase its market share in the automotive sector.

The bottom line is that U.S. steel is one of the most cyclical companies in the U.S--a beta of 2 is a testimony to this fact. With the economy recovering at a snail’s pace, U.S. Steel’s recovery is also a distant call. There’s no doubt that 2013 would be a far better year than 2012, but the economy needs more time to recuperate and so does the U.S. steel industry. In short, we remain neutral on U.S. Steel in the short run but recommend it for the long run.


Vamosrafa7 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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