On Mar 27, we issued an updated research report on steelmaker U.S. Steel (X). While the company should gain from increased cokemaking capabilities and healthy automotive demand, it continues to contend with challenging steel market fundamentals and is exposed to pricing pressure.
U.S. Steel’s adjusted earnings for the fourth quarter of 2013, reported on Jan 27, beat the Zacks Consensus Estimate. However, revenues fell year over year and missed expectations.
U.S. Steel, a Zacks Rank #3 (Hold) stock, 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 and 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.
U.S. Steel is also actively engaged in improving its cost structure and increasing revenues on a sustainable basis through its “Carnegie Way” initiative. These efforts are expected to deliver $150 million in cost and margin improvements in 2014, most of which is expected to be realized in the company's Flat-rolled segment.
However, oversupply in the steel industry and high domestic imports still remain headwinds, pressurizing prices and prospects of steel producers. U.S. Steel’s Tubular segment is expected to remain under pressure due to lower pricing.
U.S. Steel is also expected to face raw material cost pressure in the near term. The company expects raw materials costs, primarily for purchased scrap and energy, to increase in its Flat-rolled segment in first-quarter 2014. Moreover, its European division is expected to see higher raw materials costs, mainly for iron ore, during the quarter.
Other Stocks to Consider
Other companies in the steel and related industry with favorable Zacks Rank include NN Inc. (NNBR) and Norsk Hydro ASA (NHYDY). While NN holds a Zacks Rank #1 (Strong Buy), Norsk Hydro retains a Zacks Rank #2 (Buy).
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