X Details

United States Steel Corporation (NASDAQ: X), is a leading steel producer with operations spread across the U.S. and Central Europe. The company caters to various industries that includes automotive, construction, appliance, energy, containers, and packaging industries with high value-added steel products. It has an annual raw steelmaking capability of 26.2 million net tons. The company also sustains competitively advantaged iron ore production.

Healthy Results Performance in Q2FY21 (For the Quarter Ended 30 June 2021)

• Posted Record EBITDA Margin: The company has delivered a healthy performance in Q2FY21 as it has delivered record adjusted EBITDA margin that reflects the strength of a combined integrated and mini mill footprint. It has reported an adjusted EBITDA of $1,286 million during the period.
• Turnaround in Net Earnings: The company has posted net earnings of $1,012 million, or $3.53 per diluted share in Q2FY21 against a net loss of $589 million, or $3.36 per diluted share in Q2FY20. However, adjusted net earnings stood at $964 million, or $3.37per diluted share compared to adjusted net loss of $469 million, or $2.67 per diluted share in the pcp. The company's board of directors, on 29 July 2021, have declared a dividend of $0.01 per share with the payment date on 9 September 2021.

Exhibit 1: Performance Snapshot

Source: Company Reports

Material Business Updates

• Entered an MOU with Equinor US Holdings Inc - The company, on 29 July 2021, declared that it has entered in a non-exclusive memorandum of understanding (MOU) with Equinor US Holdings Inc. As per the MOU, both the companies will conduct study on the potential for carbon capture and storage (CCS) and hydrogen development in the tri-state region of Ohio, Pennsylvania, and West Virginia. The focus of the MOU is to evaluate the technological and commercial potentials for hydrogen and CCS.
• Changes to Two Asset-Based Credit Facilities - As per the press release on 23 July 2021, the company has announced changes to two asset-based credit facilities that reward performance for meeting sustainability targets. Its $2 billion asset-based revolving credit facility reduced to $1.75 billion that aids the company’s current footprint and is in-line with its efforts to optimize its global liquidity position. Apart from this, its subsidiary, Big River Steel, extended its $350 million asset-based revolving credit facility to 2026 and included the same sustainability performance targets.
• Announced Sale of Transtar, LLC - The company, on 8 June 2021, updated that it has decided to sell Transtar, LLC to an affiliate of Fortress Transportation and Infrastructure Investors LLC for a total consideration of $640 Million. The company expects the transaction to close in Q3FY21, subject to customary closing conditions including receipt of certain regulatory approvals. This sale will enable the company to focus on its core mining and steelmaking business. It is expected to utilise the funds from the sale to further strengthen its balance sheet, including deleveraging.

Key Metrics

The company has started to witness an improvement in its current ratio in FY20. The company’s current ratio witnessed a rise in FY20 to 1.67x from 1.45x in FY19. The improvement in the current ratio indicates that the company possesses better capabilities to meet the short-term obligations. Notably, the company’s cash conversion cycle largely remained stable over FY17 to FY20 as it stayed in a range of 92.8 days to 98.8 days over FY17-20.

Exhibit 2: Key Financial Metrics

Data Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 38.15% of the total shareholding while the top four constitute the maximum holding. Notably, BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. are holding a maximum stake in the company at 10.68% and 8.43%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Outlook

The company has a liquidity position of $4.176 billion, including cash of $1.329 billion at the end of 30 June 2021. The company highlighted that its financial strength provides confidence for $1 billion of additional debt reduction over the next 12 months over and above the $2.2 billion of debt reduction it has already committed to or delivered to date. Further, X is hoping of setting new records in Q3FY21 and expect to post record adjusted EBITDA in Q3FY21.

Besides, X believes that its investment in a state-of-the-art non-grain oriented (NGO) electrical steel line will further aid the company to associate with auto OEMs on their own decarbonization goals. In order to back its transition to a Best for All strategy, the company has divested its Transtar rail assets.

Key Risks

The company’s operations are exposed to the risk of price fluctuations due to the effects of exchange rates on revenues and costs. Further, it is susceptible to market risk or price fluctuations related to the purchase, production or sale of steel products.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Stock Recommendation

Over the last 3 months, the stock was down by ~-2.85% while, over the last 6-months the stock was up by ~+46.66%. The stock is trading higher than the average price of the 52-week low-high range for the stock at $6.63 - $29.97, respectively.

We have applied Price/Earnings Per Share multiple based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight premium to Price/EPS multiple (NTM) (Peer Average), considering its healthy performance in Q2FY21, strong liquidity position and debt reduction plans.

Considering the aforementioned factors along with its balance sheet strength, decent outlook, and the current trading levels, we give a “Buy” recommendation on the stock at the current market price of $24.58 per share as on 9:36am ET as on 3rd August 2021.

Technical Daily Price Chart

Source: REFINITIV, Note: The Purple color line reflects RSI-14 Period

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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