Investors Snap Up U.S. Steel Shares

The company reported a sharp year-over-year rise in fourth quarter profit, though it warned of weakness ahead

Years ago United States Steel (X) was choking on high costs while unable to charge higher prices. Now investors bought the stock on Jan. 30 after news that the Pittsburgh steel giant more than doubled its profit during the three months ended Dec. 31. While the steel market turned around in early 2006 and might recover from its more recent losses, clouds remain on U.S. Steel's horizon.

U.S. Steel's fourth quarter 2006 net income rose to $297 million, up 172.5% compared to the same period of 2005. But as steel prices weakened during recent months, its profit fell 28.8% compared to the third quarter. The company warns of more weakness ahead. "We expect first quarter results to decline from the fourth quarter," CEO John P. Surma said in a press release late Jan. 29.

A glut of supply has hit the market in recent months. U.S. Steel said its shipment volumes and prices on flat-rolled steel fell during the quarter, at the same time its production costs increased. The company's operating profit on flat-rolled products fell to $31 million during the fourth quarter, comparable to the $36 million earned in the same period of 2005 but down sharply from $230 million earned in the third quarter.

But it wasn't all bad news. "Flat-rolled demand is firming and we have restarted several domestic blast furnaces to bring our production in line with improving order rates," Surma said in the press release.

Investors bid up the stock 4.4% to $80.27 per share on the New York Stock Exchange Jan. 30.

"We expect much of the weakness in the flat-rolled group to ease, but we are wary of a slowdown in North American auto production and the impact it would have on the company," Morningstar analyst Scott Burns said in a research note. "Last year might have been a record year for the company, but we think 2007 will be a relative struggle, especially in the first quarter."

CEO Surma used his recent wins to bolster the company for the coming year. As U.S. Steel pulled in cash, it managed to slash its debt by almost $600 million and to buy back common shares to the tune of $442 million. The company also put $190 million of voluntary cash contributions into its domestic benefit plans. And it doubled its dividend rate to 20 cents per share.

Uncertainty remains. For example, it's anyone's guess what happens next to oil prices in the coming months; U.S. Steel sells things like stainless steel pipes that are used in drilling equipment. The company's tubular products business earned $144 million during the fourth quarter, down slightly from $164 million during the third quarter and $149 million year over year and.

"Long term, we see the company benefiting from consolidation of the global steel industry, a gradual reduction in employee costs for pension and health care ... and less rapidly rising raw material costs," Standard & Poor's equity analyst Leo Larkin said in a Jan. 30 research note. (S&P, like, is owned by The McGraw-Hill Companies.) But Larkin still sees limited upside to his 12-month target price of $84 per share and kept a hold opinion on the stock.

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