U.S. Steel: A Balanced View

On May 26, we issued an updated research report on U.S. Steel (X). While the steel maker should benefit from healthy automotive demand, aggressive cost management and increased cokemaking capabilities, it is exposed to weak steel market fundamentals and certain near-term operational challenges.

U.S. Steel turned in a profit in the first quarter of 2014, reported on Apr 29, on its cost-saving initiatives. However, earnings fell short of the Zacks Consensus Estimate. Revenues fell year over year and also 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 $290 million in cost and margin improvements in 2014, most of which is expected to be realized in the 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 delivery issues as well as maintenance outages in the near term. Moreover, bad weather-related logistic bottlenecks are expected to affect production and shipments in second-quarter 2014, leading to a loss in the company’s Flat-rolled segment. U.S. Steel’s European division is also expected to see weaker results in the quarter.

Other Stocks to Consider

Other companies in the steel industry with favorable Zacks Ranks include Universal Stainless & Alloy Products Inc. (USAP) and ThyssenKrupp AG (TYEKF). While Universal Stainless holds a Zacks Rank #1 (Strong Buy), ThyssenKrupp retains a Zacks Rank #2 (Buy).