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Don't Bet Against This Steel Stock

By Vladimir Zernov - Oct 30, 2013 at 12:28PM

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U.S. Steel's plan to sell inefficient assets will help the company to become profitable next year.

U.S. Steel ( X 0.85% ) recently posted its sixth loss in the last eight quarters. However, it looks like things start to get going in the right direction for the steel producer. There are several catalysts that could help the company become profitable.

Net loss shrinks
Realized steel prices improved a little. Flat-rolled steel gained 3.7% in price, while tubular steel was up 2.2%. In the meantime, steel shipments dropped 9.5%, which led to a 6.7% drop in revenue in comparison with the second quarter.

Its Lake Erie plant was shut down for most of the quarter due to a labor dispute and caused the biggest part of the production decline. At the end, the workers have accepted the contract, so you can expect that production in the fourth quarter would increase.

More importantly, U.S. Steel's net loss narrowed from $78 million in the second quarter to $20 million in the third quarter. The company has to make a final push to enter into positive territory. It's worth noticing that U.S. Steel has made a goodwill impairment charge of $1.8 billion. However, this write-off doesn't influence the cash flow, and I think it is immaterial to the valuation of the company.

Clear plan to battle costs
You must have heard multiple times from different companies that they are doing everything they can to push their costs down. In the U.S. Steel case, we actually know what they are doing. The company plans to permanently shut down operations at Hamilton Works in Canada. U.S. Steel expects to reduce cash needs for these facilities by $25 million per year.

Next, U.S. Steel is seizing operations at its oldest coke batteries at Gary Works in Indiana. It takes a decent sum of money to repair them, so U.S. Steel is hoping to save on that.

Given the current situation, U.S. Steel does not need excess production. All it needs is a positive margin. This is why the closing of non-efficient units is a wise long-term move.

Would anti-dumping measures help?
The big problem for steel producers is constant price pressure from imports. Nucor ( NUE 2.73% ) has stated for several earnings calls in a row that officials should protect U.S. steel manufacturers from unfair competition.

U.S. Steel states that it expects that preliminary anti-dumping duties would be imposed in February, 2014. It's still too early to tell how much impact they would produce. Any help is welcome, especially for AK Steel ( AKS ), which struggles to become profitable at current prices.

AK Steel narrowed its loss to $31.7 million in the third quarter compared to a loss of $40.4 million in the second quarter. However, it looks unlikely that AK Steel could do significantly better without a healthy improvement on the price front.

Nucor is doing much better, posting profit after profit. In the meantime, Nucor's upside potential is limited if low-priced imports are not pushed away from the market.

Bottom line
The question is, should you buy the cost-cutting plan? I think you should. U.S. Steel states that industry capacity utilization stays below 80%. This means that the company would not need excess production capacity for the near future. Some of U.S. Steel's assets are old and demand significant resources to maintain. It's the perfect time to get rid of these assets.

I would not be overly optimistic on anti-dumping measures until I see them implemented. As of now, U.S. Steel's plan to cut costs should be enough to make the company profitable in 2014. All in all, you can take part in the company's turnaround for what is still a reasonable price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

AK Steel Holding Corporation Stock Quote
AK Steel Holding Corporation
United States Steel Corporation Stock Quote
United States Steel Corporation
$22.57 (0.85%) $0.19
Nucor Corporation Stock Quote
Nucor Corporation
$110.50 (2.73%) $2.94

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