U.S. Steel Stock Price Down 18% – Time to Buy X Stock?

After a strong 2021, US steel stocks have looked weak in 2022. U.S. Steel Corporation (X) stock is down 18% in 2022 and is now down 36% from its 52-week highs. We saw the same story across all steel stocks and they trade at a steep discount to their 52-week highs.

The fall in steel stocks is not hard to comprehend as metal prices have tumbled. Notably, the earnings of metal and mining companies are sensitive to underlying commodity prices. As commodity prices fall, so do the earnings of metal producers. Investors are now wondering whether the worst is over for X stock and what’s the forecast for the once iconic U.S. enterprise.

U.S. Steel’s earnings were better than expected

U.S. Steel released its fourth-quarter earnings last week. The company’s sales more than doubled to $5.62 billion in the quarter, which took its 2021 sales to $20.27 billion. In the fourth quarter, X reported an adjusted EBITDA of $1.73 billion, which was ahead of estimates as well as the company’s own guidance. It generated a record $4 billion EBITDA in the second half of 2021, while the full-year EBITDA was $5.6 billion.

It was an incredible performance from X as well as other steelmakers like Nucor and Steel Dynamics in 2021. All these companies posted record earnings led by higher steel prices, which hit an all-time high last year.

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X increases share buyback

US steel companies have been posting healthy free cash flows despite investing in increasing their capacity. X ended 2021 with a liquidity of $4.97 billion, which includes $2.52 billion as cash. The company also announced a new share repurchase program of $500 million. Nucor and STLD have also been repurchasing their shares amid record free cash flows.

“2021 was a year of records and we delivered with record earnings and free cash flow and record safety, environmental, quality, and reliability performance,” said X’s CEO David B. Burritt. He added, “We enter 2022 from a position of strength and are relentlessly focused on continuing our disciplined approach to creating stockholder value. Our balance sheet has been transformed, record cash significantly de-risks strategy execution, and our capital allocation priorities have enhanced direct stockholder returns.”

Notably, X has used the cash to repay its debt and during 2021, it relinquished $3.1 billion worth of debt. The company does not have not has any significant debt maturities until 2029 and ended 2021 with a leverage multiple of 0.7x, which looks quite healthy. The company’s pension and OPEB plans are also overfunded.

U.S. Steel is working on a transformation strategy

U.S. Steel has been working on its “best of both worlds” strategy wherein it is investing in new-age mini-mills while revamping some of its older blast furnaces. It has taken several actions including halting the proposed modernization of its Mon. Valley plant. It also completed the acquisition of Big River Steel, which now contributes significantly to its earnings.

U.S. Steel is bullish on its outlook

X expects its earnings to fall on a sequential basis in the first quarter due to negative seasonality in its iron ore mining operations. The company reported $3.2 billion of free cash flows in 2021, and its CFO Christie Breves said “We expect to generate meaningful levels of free cash flow in 2022 as well.”

The company expects another year of strong performance in Europe while it expects the earnings of its Tubular segment to increase in 2022 amid higher demand from the energy industry. High oil and gas prices fuel the demand for tubular products that the segment supplies.

While X provides a quantitative earnings guidance towards the end of the quarter, it cautioned that earnings would fall from what it delivered in the second half of 2021. However, Burritt said, “We fully expect Q1 2022 to be our third highest EBITDA quarter in the past decade plus and represent another quarter, frankly, of significant EBITDA and free cash flow generation.”

U.S. Steel stock forecast

Wall Street analysts have a mixed forecast on X stock and of the 13 analysts covering the stock, only five have a buy rating. Four analysts have a hold rating while the remaining four analysts have a sell rating. Its median target price of $25.50 is a 30.4% upside over current prices. The street high target price of $50 is a premium of 155% while the street low target price of $20 is a premium of 2.3%.

Steel prices in the US have fallen sharply and the benchmark HRC now trades below $1,200 per ton, down from the almost $2,000 per ton that it hit in August. However, steel prices have settled at a much higher base than they did in previous cycles. According to Burritt, “I don’t know if I see a comeback — I’m not the best speculator on this stuff.” He added, “Prices will be maintained at a level where we can have superior performance.”

Analysts are apprehensive

Recently, Alan Kestenbaum CEO of Canadian steel company Stelco raised an alarm over North American steel markets. While expressing concern over the demand outlook, he talked about rising supplies. However, US companies seem more constructive and along with X, NUE, and STLD also sounded optimistic about the demand environment.

X stock long-term forecast

While it’s tough to think of metal companies as a long-term investment considering the cyclical nature of the business, U.S. Steel looks set to deliver strong performance over the long term. The company’s balance sheet is in a much better place now as compared to what we’ve seen over the last few decades.

Also, from an operational perspective, the company now has modern mills which will help it better compete with minimills which have gradually been snatching its market share. However, X is not perturbed about market share and is rather focusing on profitability. As Burritt said during the earnings call, “We are executing on strategic investments to expand our capabilities, capabilities that will make us a better, not bigger steel company”

Should you buy U.S. stock?

U.S. Steel trades at an NTM (next-12 months) EV-to-EBITDA multiple of only about 1.5x, which looks quite cheap. The company is working on increasing its earnings structurally and expects an annual incremental EBITDA of $850 million once the investments are completed.

X does not look too good on the charts though and trades below the 50-day as well as 200-day SMA, just like fellow US steel stocks. However, there are multiple triggers to take X stock higher including a structural rerating amid the strong balance sheet. At these prices, X looks like a good steel stock to buy and play a possible rebound in metal and mining stocks.

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