GLJ Research has raised its rating for shares of US Steel (NYSE: X), shifting from Sell to Buy, with a new price target that suggests a 23.3% upside from the stock's closing price last Friday.
The upgrade comes after a significant drop in the company's stock value, which has seen a 36.9% decline since its peak on December 18, 2023, while the S&P 500 index gained 14.1% during the same period.
The firm's decision to upgrade US Steel is based on a Sum-of-the-Parts (SOTP) analysis, which indicates potential growth for the steel manufacturer despite recent market pessimism. The analysis takes into account the consensus-modeled 2025 EBITDA for each of US Steel's segments, excluding its Mini Mill segment.
By applying peer-industry multiples and a valuation approach to the expected EBITDA, the firm arrived at an equity value that exceeds the current share price by over 23%.
US Steel's stock has been under pressure, partly due to political developments, including President Joe Biden's move to block Nippon Steel's acquisition of the company. Despite this, GLJ Research believes that the market has overly discounted US Steel's valuation.
One of the key factors in the upgraded outlook is the expected ramp-up of Big River 2, which is anticipated to start in the fourth quarter of 2024. This new venture is projected to nearly double the revenue of US Steel's Mini Mill segment by 2025, jumping to $4.222 billion in 2025 from $2.379 billion in 2024, according to Wall Street estimates.
U.S. Steel's Q2 earnings are projected to be at the lower end of its outlook, with adjusted net earnings per diluted share estimated to be in the range of $0.76 to $0.80 and adjusted EBITDA expected to be approximately $425 million. Additionally, U.S. Steel has declared a dividend of $0.05 per share.
The company, along with the United Steelworkers union and Wheeling-Nippon, has filed trade petitions against imports of corrosion-resistant steel from multiple countries. These actions aim to address the influx of low-priced and subsidized imports that allegedly undermine the U.S. market.
Analyst firms have also been adjusting their ratings on U.S. Steel. For instance, JPMorgan (NYSE:JPM) upgraded the stock from Neutral to Overweight and lifted the price target to $42.00 from the previous $40.00. Meanwhile, Jefferies maintains a Buy rating on the company, adjusting the price target to $41 from the previous $47.
U.S. Steel has warned of potential job losses and the closure of several steel mills if its planned merger with Nippon Steel does not proceed. On the other hand, the company's employees have rallied in support of the merger, emphasizing its importance for the future of the company's operations and workforce.
Finally, U.S. Steel has updated its Code of Ethical Business Conduct, incorporating guidelines for generative artificial intelligence applications.
InvestingPro Insights
Recent market activity has put US Steel's resilience to the test, and GLJ Research's upgrade comes at a time when investors are keenly observing the stock's performance. According to InvestingPro data, US Steel has a market capitalization of approximately $7.27 billion, with a P/E ratio of 13.73, indicating a potentially attractive valuation compared to industry peers. The company's gross profit margin for the last twelve months as of Q2 2024 stands at 11.42%, which, despite being on the lower side, is not uncommon in the cyclical steel industry.
InvestingPro Tips highlight that the stock's price has been quite volatile, with a significant drop over the last week and month, reflecting a 17.52% and 24.32% total return decline, respectively. However, the company has maintained dividend payments for 34 consecutive years, demonstrating a commitment to shareholder returns even amidst market fluctuations. Analysts predict that US Steel will be profitable this year, which could signal a turnaround as the company anticipates the ramp-up of its Big River 2 project.
For investors considering US Steel, it's worth noting that there are additional InvestingPro Tips available that could provide further insights into the company's performance and outlook. With the market's current volatility, accessing comprehensive analysis and real-time metrics through InvestingPro could be particularly valuable.
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