(X) Keeping U.S. Steel at Neutral

We have retained our Neutral recommendation on U.S. Steel (X). While the company should benefit from expanded cokemaking capabilities and lower raw material costs, a depressed construction market, oversupply in the steel industry and pricing pressure remain as headwinds.
Why Retained?
The largest integrated U.S. steel producer posted a net loss of $50 million or 35 cents per share in fourth-quarter 2012, a roughly 76% year-over-year decline. Adjusted loss of 41 cents a share came well below the Zacks Consensus Estimate of 75 cents. Sales fell nearly 7% year over year to $4,487 million, but beat the Zacks Consensus Estimate of $4,396 million.
U.S. Steel is looking for opportunities related to the availability of reasonably priced natural gas as an alternative to coke in the iron reduction process to improve its cost competitiveness while reducing its dependence on coal and coke in the long term.
U.S. Steel is also expanding its coke-making capabilities. The company has taken a number of steps in order to ensure long-term access to high quality coke for its blast furnaces.
Moreover, U.S. Steel is seeing strong demand in the automotive space. The company recently partnered with specialty alloy maker Carpenter Technology Corporation (CRS) to develop lighter high-strength steel for automotive applications. The collaboration will usher in incremental opportunity in the automotive market.
However, oversupply in the steel industry and increased domestic imports represent headwinds for the company. Oversupply in the industry has led to a decline in steel prices as Chinese steel production has outpaced demand.
Macroeconomic concerns, slowing growth in the emerging markets, and a sluggish construction market are still weighing on U.S. Steel’s prospects. The company expects the uncertain economic environment to affect its results in first-quarter 2013. This leads us to take a cautious stance.
U.S. Steel currently carries a short-term Zacks Rank #3 (Hold).
Other Stocks to Consider
Other steel producers with favorable Zacks Ranks are POSCO (PKX) and Commercial Metals Company (CMC). While POSCO retains a Zacks Rank #1 (Strong Buy), Commercial Metals holds a Zacks Rank #2 (Buy).

COMMERCIAL METL (CMC): Free Stock Analysis Report

CARPENTER TECH (CRS): Free Stock Analysis Report

POSCO-ADR (PKX): Free Stock Analysis Report

UTD STATES STL (X): Free Stock Analysis Report

Zacks Investment Research


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