Shares of U.S. Steel
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
On the bright side (if there is one), U.S. Steel isn't the only steel company suffering from weaker global demand. ArcelorMittal
How it stacks up
Let's see how U.S. Steel stacks up next to its peers.
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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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.