Marcial: U.S. Steel Is on a Roll
They say that a big company, like an ocean liner, is difficult to turn around rapidly. But U.S. Steel (X) may have disproved the adage. After being battered by treacherous waters in 2007, Big Steel, as Wall Street loves to call it, was able to mount a relatively quick comeback. Some bold pros who scooped up shares in late 2007, when they knocked about between $80 and $100 a share, bagged tidy profits as the stock bounced up to a 52-week high of $196 by June 24. Predictably, profit-taking and market nervousness pulled the stock down to $185 by June 26, when the Dow Jones industrial average tumbled 358.41 points, to 11453.42—the market barometer's lowest level in 2008.
To some, U.S. Steel no longer looks like the Big Steal it was when it was trading below $100. But if you look at the prospects for rising demand—and the market price the metal fetches—you would disagree. In particular, a more positive conclusion is easier to justify when you study the background of U.S. Steel and its stock: The shares typically tumble after a negative headline but quickly rebound just before good news comes rolling back.
So What Now, Big Steel?
That has also been true of some other widely followed stocks, like Research In Motion (RIMM), Apple (AAPL), and Merck (MRK). In my recent book, Seven Commandments of Stock Investing (FT Press), I laid out this scenario on these three dynamic stocks after extensive research. Time and again over the past several years, they would drop precipitously on some bad news, come back, then slide again on another disappointing development, then once again perform a robust comeback. And so on.
U.S. Steel is of the same stripe. The stock was languishing at $12 in 2001 because of industry overcapacity and weak demand. A year later, an upturn in demand appeared evident, and the stock vaulted to $37. As U.S. Steel's prospects improved, so did its stock price, which shot up to an all-time high (at the time) of $93 on Feb. 26, 2007. Just to demonstrate the stock's agility, it again sank—this time to $80—weeks later when panic selling hit as the Dow did another swoon. But U.S. Steel advanced to yet another high of $125 on June 23, 2007. How can you not pay attention to such a stock?
Fast forward to June, 2008: U.S. Steel is again hitting new highs. This at a time when the U.S. economy is in an unsettling downturn and the rest of the world isn't looking so vigorous either. But there are pockets of plentiful demand for steel in some parts of the world, such as China, India, and Russia. Worries that the prices of materials that go into the making of steel, such as metallurgical coal, iron ore, and petroleum products, are on the rise are brushed aside by people who know the industry best.
Prices and Demand Going Up
One such person is U.S. Steel Chairman and Chief Executive John Surma. He told a recent industry conference that the robust demand for steel makes the price rise in raw materials less worrisome. Worldwide usage of steel is expected to grow yearly at a 6% clip, he says. And steel prices are on the rise, too.
Bloomberg News reported that other speakers at that conference echoed the same sentiment. Lakshmi Mittal, chairman and CEO of Arcelor Mittal (MT), said there is "supply tightness" in the steel market because of strong global demand, despite the rise in steel prices.
Alexei Mordashov, CEO of OAO Severstal, observed that despite price increases, he doesn't see "significant damage to steel demand," and, in fact, he sees "demand growth everywhere in the world."
Goldman Sachs (GS) steel industry analyst Aldo Mazzaferro Jr. reflected such optimistic observations when he put U.S. Steel in Goldman's top "Conviction Buy List" on June 22, when the stock stood at $182.79. "U.S. Steel has the highest sensitivity to rising steel prices, which we believe are sustainable, as growth in world demand should exceed supply for several years, in our view," says Mazzaferro. Accordingly, he boosted his 12-month price target to $228 a share, from $210. Although the stock has outperformed the steel sector year-to-date, Mozzaferro believes U.S. Steel will continue to perform well in the near term.
He predicts "significantly higher near-term upside earnings potential given its high leverage to steel prices" and the recent price increase announced for tubular steel products for the oil industry. So he raised his 2008 earnings forecast to $17.30 a share from $16.30, and his 2009 to $28.25 from $25. The analyst says U.S. Steel should see less raw material inflation than its peers in 2009 because of its ownership of iron ore reserves. The company benefits, he adds, from long-term buying contracts on coal.
The jump in steel prices is definitely "not a pipe dream," says Michael Gambardella of JPMorgan (JPM), who rates U.S. Steel "overweight." His 2008 earnings estimates are even higher than those of Goldman Sachs—at $19.50 a share.
As of June 27, 2008 , U.S. Steel was trading at $186 and rising. The good news for investors is that even if U.S. Steel takes a dive over the next few days, or weeks, the stock's historical behavior, plus the industry's currently strong fundamentals, favor bright prospects. U.S. Steel shares may yet be a Big Steal at current levels.
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