Will US Steel Create a Rerating of Battered Steel Stocks?

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Despite some still fairly new tariff protections for the steel industry, the global hiccup in growth has been hard on the U.S. steel industry. Oversupply and overcapacity concerns continue to weigh on the steel giants, particularly if you have read about the steel industry in China, where some workers might be getting paid to show up without having to do much work.

If the saying “nothing lasts forever” is really true, maybe the steel segment has a chance to recover. United States Steel Corp. (NYSE: X) is a far cry from being as dominant as it had been in the past. After all, its $2.6 billion market cap this week was about one-third of the peak value within the past two years.

U.S. Steel already announced its Fairfield Works EAF project earlier in 2019, and the $1.2 capital spending plan was on top of an asset revitalization plan of closer to $2 billion. All in, U.S. Steel is targeting a savings of close to $90 per ton on its rounds costs for seamless production.

Earnings before interest, taxes, depreciation and amortization (EBITDA) was $285 million in the first quarter, about $60 million better than its prior guidance. Also worth highlighting was that the $3.5 billion in net revenue was up handily from the $3.15 billion seen this time a year earlier.

The question to ask after U.S. Steel’s revenue and earnings beat their consensus analyst estimates is if a rerating on Wall Street is ready to take place. Before thinking that a V-bottom is being put in place in the steel stocks, note that there have been some muted moves in some of the larger steel stocks, and analysts by and large have so far not been willing to make many bold upside calls. Many of these stocks are still viewed unfavorably or cautiously by Wall Street’s investment banking and research shops.

The pop in U.S. Steel shares was enough, along with a fairly strong market move after the unemployment report, to send its share higher by 11% Friday morning to about $16. That was after opening up over 5% at $15.06, and with a 52-week range of $14.16 to $39.23. That 52-week low was just put in the day ahead of earnings. UPDATE: At 2:00 US Steel shares were up 16.5% at $16.77 on more than 31 million shares.

In short, expectations were rather low for U.S. Steel, and many other steel giants have already reported their earnings. The VanEck Vectors Steel ETF (NYSEARCA: SLX) was last seen trading up 2.6% at $38.60, but its trading volume is quite thin and it has only $60 million in assets under management. It also has felt the carnage of steel stocks, with a 52-week range of $33.66 to $51.92.

The Van Eck Steel ETF website shows that U.S. Steel is no longer even large enough to be counted within the top 10 holdings of the fund. In fact, the largest holdings are technically not even U.S.-based companies even if their American depositary shares are actively traded in the United States. Those top 10 holdings, by weighting, make up about 68.5% of the ETF and were listed as follows as of March 31:

  • Rio Tinto, 12.72%
  • Vale, 11.53%
  • Ternium, 9.08%
  • Vedanta, 6.67%
  • Tenaris, 5.67%
  • ArcelorMittal, 4.70%
  • Reliance Steel & Aluminum, 4.57%
  • Cia Siderurgica Nacional, 4.55%
  • Nucor, 4.53%
  • Steel Dynamics, 4.50%

U.S. Steel has just a 3.44% weighting in this ETF, and it was ranked as the 14th weighting among 26 listed positions.

The following shows how some of the other more well-known U.S.-based steel and related metals companies are doing on the heels of U.S. Steel.