United States Steel: Better Times Lie Ahead for This Steel Company

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May 25, 2015

United States Steel (X, Financial) is struggling. The recent results also indicate that the company has to take some concrete steps and strategies to lift its performance. The management of US Steel is, in fact, working on various initiatives to improve its profitability. It has taken some bold steps in the past which might not be good for the employees but are expected to be good for US Steel in the long term. In the light of these, Let us have a closer look at the overall underlying business of US Steel.

There are number of initiatives that the company is working on. To deal with the current market environment, US Steel has reduced its operating grades at all of its facilities in North America. These adjustments by the company will help it to serve its customers best with prime quality and cost in the most effective way. However, these steps are just a minor initiative, the company has to shift its focus at some key elements which can drive its performance in the coming quarters.

The problems

If we look at US Steel in respect to the overall steel industry, the company is largely affected by the increase in the number of steel imports in the North American market. This is leading the company to further cut its costs by cutting its workforce. With this it is striving to maintain its profit margins even in the unfavourable market.

Moving ahead, US Steel thinks cost reduction the only way to maintain its margins and to facilitate this, US Steel is exploring various opportunities in front of it that it thinks might help it to eliminate, defer and reduce costs. In addition, US Steel also has many cost levers that it is focusing to pull in response to be profitable in current downtrend market condition. The company thinks these initiatives are good and will help the company to overcome crunches in the near term by reducing costs by about $200 million.

US Steel is also counting on its blast furnaces which are idled at its steel producing facilities. The furnaces at places namely Fairfield, Granite City and Gary are expected to help the company to ramp up the steel production. As the demand are expected to grow in future, US Steel is confident that it is well positioned to meet the customers' demand.

Long-term focus

Besides focusing on the short-term action plans, US Steel is also concerned about its long-term growth prospects. To secure long-term gains, its commercial entities are firmly in place and are actively engaged with its customers to find the differentiated steel solutions to drive higher margins in the long term. In addition, US Steel is also engaged in implementing its Carnegie way driven reliability center maintenance program at all of its facilities. These are expected to be wise moves by the company as these will result in more consistent, efficient cost-effective and safe operating conditions.

Moving ahead, there are some positive growth indicators. The steel industry is expected to roll out with the positive growth signs from the automotive market as well as construction business. This will ramp up the demand for the construction equipment that will also push the selling price further. This will improve its margins as well.

Conclusion

Moving on to the fundamentals, the stock looks reasonable with the trailing P/E of 34.30 while the forward P/E of 16.10 shows good growth in the earnings in the near term. However, this can be just due to the short comeback by the steel industry. If we look at the next five years, the company’s earnings are declining at a CAGR of -3.93% which is less than the industry average of 1.26%. Considering all these points investors should definitely pick US Steel for short-term gains.