Shares of U.S. Steel (NYSE: X ) hit a 52-week low on Tuesday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.
How it got here
U.S. Steel is one of the many stocks you can buy or bet against that will closely mirror the sentiment of the global economy. Its flat-rolled and tubular steel products rely on manufacturing growth in the U.S. and China to fuel demand. With construction in the U.S. remaining weak and China's GDP growth slowing, an uncertain near-term outlook has sacked U.S. Steel's share price.
But it isn't just those two regions that are cause for concern. The company's European operations have been negatively affected by the debt crisis, seeing losses of $34 million and $89 million over the past two quarters. Also, as the Fool's Dan Caplinger pointed out yesterday, both it and AK Steel (NYSE: AKS ) have underfunded pensions and don't have strong enough cash flow to quickly remedy that problem.
On the bright side (if there is one), U.S. Steel isn't the only steel company suffering from weaker global demand. ArcelorMittal (NYSE: MT ) sold off its 24% stake in European energy company Enovos International in the first quarter in order to raise $428 million to aid in its turnaround efforts after its profits fell to just $0.01 per share from $0.69 in the year earlier. Nucor (NYSE: NUE ) saw its profits dip 9% as a weak construction market weighed on results. Even Steel Dynamics (Nasdaq: STLD ) , which found success in select markets for its flat-rolled steel, announced a 41% decline in year-on-year operating income because of lower margins.
How it stacks up
Let's see how U.S. Steel stacks up next to its peers.
X data by YCharts
Hide the children because these are some PG-rated returns! As goes the global economy, so goes the steel sector, and construction just hasn't come back as quickly as other sectors.
Source: Morningstar, Yahoo! Finance. N/M = not meaningful.
The first thing you'll notice is how deceptively cheap these steel companies appear. What the above metrics don't tell you, but what you can see for yourself through Yahoo! Finance's estimates, is that EPS estimates for all four companies have been dropping rapidly over the past three months. AK Steel has been the weakest, with the company missing Wall Street's projections in three of the past four quarters.
The real concern here for AK Steel and U.S. Steel are those aforementioned underfunded pension plans and their already high levels of debt. Over the past two years AK Steel shareholders have suffered through a free cash outflow of more than $500 million while U.S. Steel shareholders have dealt with a free cash outflow in excess of $2.4 billion since 2009!
Nucor might appear to be the priciest, but it's also in the best shape relative to the group. Nucor has benefited from an increase in average selling prices per ton, prudent fiscal management, and moderate growth in the automotive market. If my arm were twisted, I'd say it's the best performer of this bunch.
Now for the $64,000 question: What's next for U.S. Steel? The answer largely depends on whether the global outlook improves for the construction and automotive industries and if it can solve its cash flow problem relating to its pension plans without further adding to its debt burden.
Our very own CAPS community gives the company a three-star rating (out of five), with an overwhelming 92.7% of members expecting it to outperform. I, too, have made a CAPScall on U.S. Steel, however, as a noted contrarian, my call of underperform has me up 33 points.
Aside from AK Steel, I consider U.S. Steel to be the worst company in the sector. Its cash outflow is enough to scare even the riskiest investors back under their beds and its pension problems aren't going to be an easy fix. U.S. Steel's outlook comes down to the overall health of the global economy. Until China's manufacturing growth picks up or Europe stabilizes, it should continue to weaken.
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