United States Steel's (X +0.00%) place in history is secure, given how important the company was to the creation of the steel industry. But US Steel is no longer the industry-leading company it once was. Here's what's going on with this iconic steelmaker, and why peers Nucor (NUE +3.02%) and Steel Dynamics (STLD +2.42%) will likely be worth more than US Steel in five years.
What does United States Steel do?
US Steel makes steel, but that's not really the important thing here. It is the way in which US Steel makes steel that's notable.
Although it has diversified its production processes, the business was built on blast furnaces. This is an older steelmaking technology that uses iron ore and metallurgical coal to create primary steel. This is still an important thing to do, but blast furnaces are only profitable when they are run at high utilization rates.
Image source: Getty Images.
During steel industry downturns, when demand is weak and steel prices are low, blast furnaces tend to bleed red ink. This is why US Steel has been focused on building electric arc mini-mills, which use scrap steel and electricity to produce new steel products for sale. This technology is more flexible than blast furnace technology and can be ramped up and down with demand. Thus, electric arc mini-mills tend to have more attractive profit margins through the entire steel cycle.
This technology is what underpins the businesses of both Nucor and Steel Dynamics. It is the first, and most notable, reason why investors will likely be better off buying either of these two steel mills over US Steel. But there's more than just this foundational fact to consider.
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Additional reasons to like Nucor and Steel Dynamics
The second big issue around US Steel today is that it is what's known as "in play" on Wall Street. Currently, there's a plan for the company to be bought out by a large Japanese steel mill (Nippon Steel). That deal has become a political football, so there's no telling whether it takes place.
If it doesn't, US Steel has other suitors waiting in the wings. But that doesn't mean a transaction will happen.
If US Steel gets bought by Nippon Steel or someone else, it will cease to exist as a stand-alone business. If it doesn't get bought out, it still has the problem of making primary steel using blast furnaces. Either way, investors are probably better off avoiding US Steel and buying either Nucor or Steel Dynamics, or both.
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The third big reason to like Nucor and Steel Dynamics over US Steel is that they each have very specific growth plans. Nucor is investing in new facilities and expanding its reach, often via acquisition, into higher-margin steel parts businesses. This is the same game plan that it has used for years and the one that has allowed it to become a Dividend King. Slow and steady growth is likely to continue for years.
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Steel Dynamics also has a growth plan, but it's a bit more aggressive. First, it is, like Nucor, investing in new facilities and expanding its reach into higher-margin steel parts businesses. But on top of that, it is also expanding its business into the aluminum sector.
So far, Steel Dynamics' more growth-oriented model has worked out well for investors, noting the 10-year annualized dividend growth rate of over 10%. Assuming Steel Dynamics is as successful in aluminum as it has been in steel, this could be a very attractive growth stock. There's just an additional layer of execution risk involved in the approach compared to Nucor.
Buy Nucor and Steel Dynamics for the long term
The steel industry is out of favor right now thanks to economic uncertainty and geopolitical issues, notably including tariffs. That could be a buying opportunity for long-term investors. But make sure you buy the best companies if you do decide to step into the steel sector. In North America, that basically means Nucor and Steel Dynamics, both of which are likely to be worth more than US Steel in five years, if that company still exists at all.
