U.S. Steel recently reported record third quarter results with net earnings of $2.0 billion, or $6.97 per diluted share, with $6 billion in revenue. For the nine months ended September 2021, revenue increased 105% to $14.7 billion. U.S. Steel ended the quarter with cash of $2 billion.
While more than ten analysts cover the stock, Curt Woodworth, Credit Suisse, is the most bullish with an Outperform Buy Rating and target price of $49.00. The consensus price target is $33.00.
The most bearish on the stock in recent years is analyst Timna Tanners, formerly with Bank of America (BofA) and now with Wolfe Research. As early as March 2019, she theorized that steel capacity would increase by 20% in 2022 pushing prices down so dramatically that she coined the phrase “Steelmageddon.”
CNBC and other mainstream financial media jumped on the bandwagon. On March 19th, 2019 CNBC published an article titled: “Steel stock investors beware: Price-crushing ‘Steelmageddon’ is coming, says BofA.”
The author of the article, Tom DiChristopher, wrote that “the impact will be so punishing, the investment bank is dubbing the next several years of upheaval ‘Steelmageddon.’” Her incorrect thesis basically said the coming glut of capacity and supply will cause a significant decline in steel prices. To understand how wrong Tanners’ thinking was, and how the proverbial “experts” often get it wrong, at the time she rolled out her thesis, hot rolled coil (HRC) steel was trading between $650 – $750 per ton. She predicted prices would fall to $550 to $660 per ton in 2021, but that has not happened. In fact, HRC is now trading at $1786 per ton (as of November 17, 2021). Tanner predicted that the U.S would not lift the 25 percent tariffs on China steel. On that one point, she is correct. She also argued that increased capacity from Nucor and Steel Dynamics, the heavyweights, would increase supply and contribute to falling prices.
Paraphrasing BofA, CNBC’s DiChristopher echoed Tanners, writing: “Steel stocks might hold up through 2019 and possibly into 2020, but Merrill says long-term investors can start fading the stocks by the end of this year.”
In fact, steel, as noted by Credit Suisse analyst Curt Woodworth in a U.S. Steel sector report published in August 2021, “has been the best performing commodity from the 2020 lows, with prices up almost 4x for hot rolled.” As for U.S. Steel (NYSE:X), its market cap has doubled from $3.4 billion to $7.1 billion since Tanners’ dire predictions in March of 2019. Still holding onto her incorrect thesis, in March of this year, Tanners gave U.S. Steel an underperform rating and a price target of $12.00.
But in November, she raised her target price to $27.00 and a HOLD rating. She highlighted X’s “strong balance sheet, record 3rd quarter EPS of $6.97 a share” and the fact that their pension is overfunded.
Tanners appears to have backed off her “Steelmageddon” thesis, but still has a “cautious view on steel prices.” Importantly, U.S. Steel noted in its 3rd quarter earnings call that they are “delighted to hear from multiple Auto customers who are foreshadowing that the trough of the chip shortage could be behind us. They are beginning to add to their 4Q/1Q build schedules and indicating to us increasing usage rates starting as early as next week.”
Shortly after U.S. Steel reported its third-quarter earnings, Credit Suisse reiterated its bullish stance on the steel industry with a publication titled: “Transition from Transitory Section 232 to Structural TRQ System is a Long-Term Win for US Steel Sector.”
The report says that while the 25% tariff on China steel imports remains in effect, there was a change to Section 232 of the Trade Expansion Act (which gives the President the power to adjust steel imports through the use of tariffs) with a Tariff Rate Quota (TRQ).
Woodworth argues that the change will have little impact on the U.S. Steel sector; making the point that already 55% of sheet imports are either “excluded from tariffs or subject to TRQ’s. Moreover historically, Europe has accounted for 15% of total HRC imports or 2% of apparent U.S. demand.” He also notes the U.S. and EU are working toward a carbon emissions agreement, which bodes well for and other U.S. steel producers. U.S. Steel is ideally positioned to benefit, having made serious investments in finishing capabilities that are driving new growth in value-added sustainable steels.
In addition to the record third-quarter results, investors should also be encouraged that U.S. Steel announced a $300 million stock repurchase program and increased its quarterly dividend to $0.05 per share.
Woodworth says that U.S. Steel is the cheapest steel stock in their coverage universe and argues that the “market needs to rethink the U.S. Steel valuation.”
