US Steel Investors May Be In For A Reality Check

Shares of United States Steel Corporation (NYSE: X) have traded higher by 17.2 percent in the past three months, but Longbow Research analyst Chris Olin believes the stock could be headed lower in the near term. According to Olin, there is a disconnect between positive investor sentiment and deteriorating market fundamentals, particularly in oil country tubular goods (see Olin's track record here).

“Over the past 2-3 weeks, our proprietary channel work has detected slower-than-expected demand trends, inventory drawdown pressure, and price vulnerability for the two main operating segments in the portfolio (Domestic Steel and Tubular),” Olin said.

Olin said he sees limited EBIT upside for U.S. Steel over the next several quarters.

Hot-rolled coil pricing remains under pressure with downside risk to trading and distribution contracts as low as $560, Olin said. Steel demand has disappointed to the downside for several reasons, including Section 232 inventory correction, delayed nonresidential construction, and negative price speculation.

Longbow has dialed back its expectation for tubular demand in 2018 and is now calling for a total rig count reduction of 10 to 15 percent next year.

In the near term, Longbow is projecting a modest earnings beat from U.S. Steel in the third quarter, driven mostly by favorable U.S. and European steel pricing. Longbow’s full-year EBITDA guidance of $1.1 billion is in-line with the company’s guidance.

For investors, Longbow’s $24 fair value is based on an EBITDA multiple of 6x and suggests modest downside for the stock from its current $27 price tag. The company’s asset revitalization initiative coupled with Chinese capacity adjustments could make the stock a compelling play again headed into 2019, Olin said.

Longbow has a Neutral rating on U.S. Steel with no assigned price target.

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