U.S. Steel Is More Than Just A Nostalgia Play

Now that U. S. Steel is again trading as a steel company, after being split out of USX, a number of old fans are coming back to cheer. No, it isn't nostalgia that's drawing them--just plain old business fundamentals. Never mind that the Street is ignoring the stock, which started trading on the Big Board on May 7 at $22 a share. Recent buying by some smart-money investors has pulled it up to 25. These pros are betting that the stock will double within the next 12 months.

Wishful thinking? Not at all, says investment manager Bob Gintel, who runs three mutual funds, with assets of nearly $300 million. In recent years, he notes, U. S. Steel has drastically restructured by slashing fixed costs and streamlining capacity. USX shareholders approved on May 6 a recapitalization that divided USX stock in two--the USX-U. S. Steel Group and the USX-Marathon Group, the company's oil unit. The steel group includes USX's diversified businesses, such as coal, real estate, and financial activities.

NOW'S THE TIME. So to Gintel, this is the time to snap up Steel--when the shares are still unpopular and way undervalued. The Street, he says, has yet to recognize Steel's robust earnings power as the economy picks up and demand for steel rises. This year, Steel will be in the red, Gintel concedes, but that's the bottom. Steel will be in the black next year, figures Gintel, earning $137 million, or about $2.70 a share.

The real impact of Steel's cost-cutting and efficiency efforts will come in 1993, when Gintel expects the steel operations alone to produce earnings of $865 million. For that year, he sees total company profits of $530 million, or about $10.50 a share.

Analyst Paul Kuklinski of Cowen & Co. is another bull who says that Steel is now selling at a big discount to other steel companies. "With the recent writedowns of its last major unprofitable facilities and the completion of its big capital spending next summer, U. S. Steel will be the most efficient, low-cost domestic integrated steel company, capable of competing in world markets," he says. And Steel wants to sell assets from its other businesses worth about $1.5 billion. The money could be used, he says, to pay off debt and buy back shares.

The stock, says Kuklinski, could hit 50 even before the end of the fourth quarter, when earnings are expected to start showing up. Based on 1993 estimates, he says, his ultimate target for the stock is $64 to $72 a share.

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