United States Steel Corp. (X) engages in the manufacturing and selling of steel products. It operates through the following business segments: Flat-Rolled Products, U.S. Steel Europe, and Tubular Products. The company was founded in 1901 and is headquartered in Pittsburgh, PA.
I am bullish on X stock. The company delivered strong financial results in the first nine months of 2021, and the stock is now attractive even after one-year gains of approximately 48%.
United States Steel Business News
In mid-December 2021, United States Steel Corporation provided fourth-quarter 2021 guidance stating that it expects adjusted EBITDA to be approximately $1.65 billion.
Strategic collaborations are very important in business as they can provide economies and scale and mutual benefits for all parties involved. It is no surprise then that United States Steel announced that “three of America’s leading industrial and transportation companies – United States Steel Corporation, Norfolk Southern Corporation (NSC) and The Greenbrier Companies, Inc. (GBX) – today jointly announced a new, more sustainable steel gondola railcar.”
These newly designed gondolas carry several interesting benefits: extended lifecycle, increased sustainability, more energy-efficient, and greater freight capacity.
In early November 2021, the firm announced it had strengthened its balance sheet by de-risking a part of its pension plan. It was stated that the pension “plan remains more than 100% funded and is an important source of differentiation versus some peers in the steel industry.”
Other important news includes a $300 million stock repurchase program and a large dividend hike of 400% as the quarterly dividend increased to $0.05 per share, or $0.04 per share more than the previous quarter’s dividend.
Third-Quarter 2021 Results: Significant Improvement, Return to Profitability Continues
As of Q1 2021, X stock earnings show a continued significant improvement.
United States Steel beat on EPS GAAP and revenue in Q3 2021. EPS GAAP reported figure of $6.97 was a beat by $2.04, and revenue of $5.96 billion was beat by $210 million.
On a year-over-year basis, net earnings of $2 billion, or $6.97 per diluted share, were higher than net losses of $234 million or $1.06 per diluted share.
“We continue setting records, including record net earnings, record EBITDA, record EBITDA margin, record liquidity, record safety, and record quality and reliability,” said U.S. Steel President and Chief Executive Officer David B. Burritt.
Fundamentals: A Large Transformation Under Way
Looking back at Fiscal 2019 and Fiscal 2020, United States Steel’s business was in severe trouble. Sales growth was declining and negative, with net losses reported back-to-back and negative free cash flow. The debt/equity ratio rose to 1.84 in 2019 and further to 2.1 in 2020. From a fundamental perspective, X stock was subject to severe risks.
The first nine months of 2021 have shown a whole new fundamental analysis, making X stock much more attractive, which was reflected in its stock price performance.
To start, the company turned again to net profitability, strengthened its balance sheet by reducing its debt/equity ratio to 1.16, delivered very strong net income growth, positive free cash flow, and substantially increased its dividend.
The stock repurchase program announced is also a very positive factor, a signal that the management considers its stock to be attractive at these price levels.
It is still too early to consider United States Steel stock among Top Dividend Stocks, but recent quarter-over-quarter improvements in key metrics such as free cash flow have been impressive. In Q2 2021, free cash flow growth was 3,476% to $844 million.
Not all things are great, though, for X stock. Shareholders have been diluted in the past year, with total shares outstanding growing by 22.6%.
Valuation: A Value Pick
X is attractive based on its P/E ratio of 2x compared to the U.S. Metals and Mining industry average of 8.9x and based on its P/B ratio of 0.8x compared to the U.S. metals and mining industry average of 2.1x. Its forward P/E of 1.6x is very attractive compared to the materials sector median value of 14.9x.
Wall Street’s Take
Turning to Wall Street, United States Steel has a Hold consensus based on two Buys, three Holds, and two Sells ratings. The average United States Steel price target of $28.00 represents 12.5% upside potential.
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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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