United States Steel (X, Financial) delivered strong results in the recently reported quarter. It saw strong growth in its business, and is now thinking of reducing its cost structure to increase profitability. It plans to focus mainly on those projects that are beneficial for its business, and can help the company develop solutions that can create value for its customers. The strong financial performance and impressive improvement in the EBITDA shows that United Steel has strong long-term prospects.
A strong track record indicates better times ahead
United States Steel enjoys a good track record of performance which can also be a key reason for growth in the market share in future. It is pleased to see impressive tripled growth in the operating income since 2013. Moreover, the company is still seeing favourable market condition in 2014 than it was in 2013. This will give much room to U.S Steel to improve its performance. However, it is also making significant progress towards its Carnegie Way Transformation which will again contribute largely to its earnings growth.
The company is also having a strong balance sheet as it generated strong cash flows which clearly reflects its strong liquidity position as well. Further for the upcoming quarters, U.S Steel has disciplined cash management strategy under which it will be largely focusing on generating strong cash flows. Another important contribution on the balance sheet is that the company’s credit ratio is improving which is strengthening its balance sheet further. This will help the company to stand firmly against the short term challenges in the steel industry and also to take the advantage of opportunities that can have a long term benefit for it.
Beyond the headwinds
However, U.S Steel is might also face headwinds in 2015 due to lower oil prices, lower steel prices and impact of stronger U.S dollar and global over capacity of imports. But still it thinks that the positivity from its Carnegie Way can offset offset the headwinds during 2015. It is expecting the Carnegie Way to continue to benefit U.S Steel in 2015 by generating strong cash flows and liquidity. The studies reveal that the U.S economy is expected to get better at moderate rates which will also help the steel prices to improve.
However, the decline in the oil prices is also a matter of worry for U.S Steel. This backdrop will surely affect its tubular segment. To deal with it, U.S Steel is engaged in adjusting its tubular operations as declining rate counts are reducing the demand for OCTG products.
Conclusion
Now moving to the fundamentals, the stock with a trailing P/E of 36.58 looks reasonable but the forward P/E of 8.92 shows slow earnings growth in the near term. This might be due to the short term headwinds that the company is facing due to weak oil prices. For the next five years as well the company is not impressive as its earnings are showing negative profitability at a CAGR of -1.31% as compared to industry average of 2.22%. So in my opinion I would like to suggest the investors to see investment in U.S Steel from side lines and to pick other profitable stock in the league.
