U.S. Steel (
) can significantly raise its value by focusing on profit margin
improvement for its U.S. flat-rolled steel division. U.S. Steel is
currently the tenth largest steel producer in the world, with an
annual raw steel production capability of nearly 32 million tons.
The company competes with international steel giants
like ArcelorMittal (
), BaoSteel, Posco (
), Nippon Steel and ThyssenKrupp.
We maintain a
price estimate of $60.17 for U.S. Steel's stock
, a premium of about 15% to its current market price.
U.S. Flat-Rolled Steel is the Company's Largest Source of
U.S. Steel's flat-rolled steel division contributes
almost 42% to our estimated stock value for the company. This
division represents the company's sale of flat rolled steel to its
customers in the United States, which includes steel plate products
used for ship building, construction, large diameter welded pipes
and boiler applications, as well as strip products used in
automotive body panels and domestic white goods.
U.S. Steel has a competitive advantage over other steel
manufacturers in the U.S. due to its long-standing relationship
with the biggest players in the automobile industry. Sales to major
American automobile companies including GM, Ford and Chrysler
constitute almost 20% of the division's sales.
… But it Can Still Do Better
U.S. Steel, however, does not seem to be putting enough emphasis
on improving profitability of this division. We believe that the
operating performance of this division is still well below that of
its competitors, meaning that there is quite a lot of value that
can be unlocked by simply controlling input costs better.
One of the benchmarks for the division's overall performance
is ArcelorMittal's American flat-carbon steel
operations. ArcelorMittal is the world's largest steel
producer, and as the chart above illustrates, its American flat
carbon steel operations are holding EBITDA margins in excess of
In comparison, U.S. Steel's flat-rolled products division has
struggled to achieve 10% EBITDA margin in recent years despite
manufacturing and selling similar products. This EBITDA margin
trend is illustrated in the chart below.
While ArcelorMittal definitely holds the advantage in economies
of scale, we do believe that U.S. Steel has an opportunity to
steadily lift its profit margins over the coming years.
See our full analysis for U.S. Steel