Inside Wall Street: Is US Steel ready for a rebound?

Long shunned by Wall Street, shares of Big Steel are attracting fresh attention as a turnaround bet.

By Gene Marcial Feb 15, 2012 2:22PM

Image: Bull (© Photographers Choice RF/SuperStock)Once the formidable giant of the steel industry and the world's fifth largest integrated steel manufacturer, U.S. Steel (X) has been among the worst victims of the global recession.

Its stock has been badly battered, down more than 50% in the past year, to $27 a share, as the company's sales and earnings crashed in 2009 and 2010. At its peak in June 2008, shares of Big Steel traded as high as $191.96 a share.

Even as Wall Street and most investors continue to avoid the stock, however, some of the smart-money crowd are projecting the company will be the next comeback kid and should stage a robust rebound that they believe started in late 2011. The skeptics may be in for a big surprise.

The new Big Steel bulls argue that the steel maker is projected to pile up solid earnings beginning in 2012 as the global economic recovery starts to drive demand for its products, including a wide variety of steel sheet, plate, coke, taconite pellets, and tubular and tin products. A sustained recovery in the construction and automotive industries, as well as other industrial sectors, should lift demand.

Although the company posted a loss in the fourth quarter of 2011, some analysts, including those that continue be on the fence about U.S. Steel's stock, have raised their earnings forecasts as well as their price targets for the shares, based on what they perceive as improving fundamentals.

"We believe U.S. Steel's core operating results will improve significantly in the coming quarters, due to the combined impact of improving underlying prices and volume, lower costs in the company's flat-rolled business, and the lack of a significant negative drag on overall results from the recently divested mill in Serbia," says David Gagliano, metals and mining analyst at Barclays Capital. He notes that Serbia cost the company $65 million in after-tax profits in the fourth quarter of 2011 alone. "Simply removing Serbia from the mix should add 45 cents to the quarterly earnings per share," figures the analyst. The drop in the price of natural gas should help, he adds.

After analyzing the fourth-quarter results, Mark L. Parr, an analyst at KeyBanc Capital markets, raised his earnings forecasts and price target, jacking up his estimate for the first quarter of 2012 to 47 cents a share from 36 cents, and his projection for all of 2012 to $3.30 a share from $2. Those numbers are much higher than the Wall Street's consensus forecast of 22 cents a share for the first quarter and $2.46 for all of 2012.

Part of the optimism about U.S. Steel's outlook stems from the improving operating margins. Analyst Randy Shrikishun of Value Line, an independent investment research firm, notes that price increases, greater capacity utilization, and further cost-containment efforts will probably help operating margins return to the double-digit levels. Clearly, business should pick up in 2012, helped by higher contract prices and increased shipments, says the analyst.

Over the long term, "better control of raw material costs in domestic operations through vertical integration, consolidation in the steel industry, and a secular increase in demand for oil country tubular goods," should help spur earnings growth, says Leo J. Larkin, steel industry analyst at S&P Capital IQ. And he thinks the concentration of steel production in the hands of fewer companies driven by fierce competition and the economic recession will result in "greater pricing and production discipline," which in turn will lead to less volatile swings in pricing and profits.

But like many Wall Street watchers of U.S. Steel, Larkin continues to have a "hold" rating on the stock, mainly because of the slow projected U.S. economic growth. Such skepticism, however, could be a positive for investors who want to pay bargain prices for stocks that are on the way up.     

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



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