The One Thing to Know About United States Steel

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company's leadership plays second-fiddle to other categories of analysis. However, at Fool.com, we believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether or not to invest in a company, failing to vet its CEO is a big mistake. In fact, if you've overlooked the study of a company's leadership, then that's the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of United States Steel's (NYSE: X  ) leadership.

How much skin do they have in the game?
Are United States Steel CEO John Surma's interests aligned with shareholders? Here's how the United States Steel CEO's ownership compares to that of his peers in the steel and metals and mining industries.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

John Surma, United States Steel

264,143

0.18%

$13

Richard Adkerson, Freeport-McMoRan Copper & Gold

913,165

0.19%

$67

Daniel DiMicco, Nucor

483,783

0.15%

$19

Klaus Kleinfeld, Alcoa

25,447

0.00%

$0

Mario Longhi, Gerdau Ameristeel

874,760

0.20%

$10

Source: Capital IQ, a division of Standard & Poor's.

John Surma actually owns $13 million worth of United States Steel, or 0.18% of shares outstanding. We Fools prefer CEOs who have higher ownership stakes in their businesses, since that better aligns their interests with shareholders'. However, while we think high insider ownership is a good sign, low insider ownership isn't necessarily a bad one. CEOs may be relatively new, or may have a low percent of shares outstanding, but a high total value of ownership.

How well are they using your money?
Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here's a look at United States Steel's recent return on equity:

United States Steel's current return on equity falls below its five-year average. While recent economic conditions have been challenging, declining return on equity shows either that management hasn't been able to control costs and manage assets, or that it's failed to move into higher-return businesses over the last five years.

How productive are their workers?
Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure, or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, United States Steel's revenue per employee has moved below its five-year average. This might mean that the company's hiring too many people, or spending too much. To better see if United States Steel's cost controls are actually deficient, let's compare the company to its peer group once again:

Company

2005

2007

2009

Last Year's Revenue Per Employee vs. 5-Year Average

United States Steel

$305

$344

$258

(26%)

Freeport-McMoRan Copper & Gold (NYSE: FCX  )

$478

$667

$526

(9%)

Nucor (NYSE: NUE  )

$1,124

$922

$549

(44%)

Alcoa (NYSE: AA  )

$198

$274

$313

18%

Gerdau Ameristeel (NYSE: GNA  )

$541

$573

$534

(9%)

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands.

Though United States Steel's revenue per employee has been declining, its results still beat those of its peer group.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.

Jeremy Phillips does not own shares of the companies mentioned. Nucor is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2010, at 6:51 PM, MegaEurope wrote:

    Though United States Steel's revenue per employee has been declining, its results still beat those of its peer group.

    ??? Unless I'm reading the table wrong, X beat Nucor but was crushed by the others.

  • Report this Comment On August 20, 2010, at 8:57 AM, pinestholdings wrote:

    Also, its a commodities business. You have to fix the commodities price or else ROE is a meaningless statistic (the company spends $X on investment, produces a commodity - if that commodity price swings down, their ROE is terrible, but if it swings up, the ROE is huge). To say that ROE for a commodity company is a reflection of management is nuts. You could superimpose a graph of steel prices on top of that graph and it would be nearly identical. You can't measure a commodity company by ROE. This is basic security analysis.

    I would also suggest that the "insider value" analysis makes no sense without more details. If that CEO makes $30 million a year, yeah, $13 million in stock is only half his annual salary, and that isn't that high. Conversely, if he makes $2 million a year, that $13 million is enourmous. The article's take - "He has $13 million invested, thats not quite high enough, but then again maybe it is!" - is random and doesn't have much application for investors without knowing the rest of his financial picture.

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