Analysis: US Steel's Investment Needs Are 'Grossly Misunderstood'

After a strong finish to 2016, United States Steel Corporation (NYSE: X) has been one of the worst stocks in the market this year, plummeting 36.7 percent year-to-date.

A large part of the weakness in U.S. Steel shares may be due to investors misunderstanding the company’s investment needs, JPMorgan analyst Michael Gambardella says.

Gambardella recently spoke with new U.S. Steel CEO Dave Burritt about shareholder concern that the company isn't investing in updating its assets. U.S. Steel’s major problem maybe with communication rather than performance. U.S. Steel hasn't been underinvesting in its facilities, Gambardella says (check his track record here).

“The company has been expensing many items that competitors have been capitalizing,” he wrote. “The result is that X appears to be underinvesting while also having higher expenses and lower EBITDA margins versus its competitors.”

Related Link: Steel Analyst Says The Market's Become Too Bearish On China, Upgrades Entire Sector 

Burritt says U.S. steel recently switched its accounting methodology to be more in-line with peers, a change that Gambardella estimates will add $175 million to the company’s EBITDA in 2017. In addition, Gambardella expects the company will make communicating this change a priority on its next earnings call so shareholders better understand what’s going on.

In the meantime, U.S. Steel should continue to benefit from the Trump administration’s reduction of import supplies in the near-term and infrastructure investment in the long-term. If the administration chooses to implement steel quotas to prevent foreign companies from circumventing trade laws, it would further boost domestic steel demand.

JPMorgan has an Overweight rating for U.S. Steel and a $46 price target for the stock.