On Nov 7, we retained our Neutral recommendation on largest integrated U.S. steel producer U.S. Steel (X). While the company remains challenged by weak steel market fundamentals and higher costs, it should gain from healthy automotive demand, increased coke-making capabilities and efforts to improve its cost structure.
Why Maintained?
U.S. Steel swung to a loss in third-quarter 2013, reported on Oct 28, on a hefty impairment charge. However, the adjusted loss was narrower than the Zacks Consensus Estimate. Revenues fell by double digits year over year and missed the Zacks Consensus Estimate.
U.S. Steel is looking for opportunities related to the availability of reasonably priced natural gas as an alternative to coke in the iron reduction process to improve its cost competitiveness while reducing its dependence on coal and coke in the long term. The company is also expanding its coke-making capabilities. It has taken a number of steps in order to ensure long-term access to high quality coke for its blast furnaces.
Moreover, U.S. Steel is seeing strong demand in the automotive space. Its partnership with specialty alloy maker Carpenter Technology Corporation (CRS) to develop lighter high-strength steel for automotive applications will usher in incremental opportunity in the automotive market.
Moreover, U.S. Steel is actively engaged in improving its cost structure and increasing revenues on a sustainable basis through its “Project Carnegie” initiative.
However, macroeconomic concerns, slowing growth in emerging markets, and a still sluggish construction market are weighing on U.S. Steel’s prospects. Oversupply in the steel industry and increased domestic imports still remain headwinds.
Higher operating costs, mostly due to impairment charges, hurt U.S. Steel’s bottom line in the third quarter. The company envisions repairs and maintenance costs to rise sequentially in the fourth quarter at its Flat-rolled segment due to blast furnace reline at Gary Works and blast furnace maintenance at Fairfield Works.
Moreover, U.S. Steel expects to take a write-down charge of roughly $225 million in the fourth quarter as a result of its decision to shutdown iron and steel making operations at Hamilton Works in Canada.
Other Stocks to Consider
Other companies operating in steel and related industries worth considering are Companhia Siderurgica Nacional (SID) and Mueller Water Products, Inc. (MWA). Both hold a Zacks Rank #2 (Buy).
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