Morningstar | Heavy Reinvestment and Lower Margins Loom For U.S. Steel After Strong 2018; Lowering FVE To $21. See Updated Analyst Note from 31 Jan 2019
Having updated our valuation model for U.S. Steel, we've lowered our fair value estimate to $21 per share from $25. Our no-moat rating is unchanged. Our fair value falls due to lower near- and medium-term profit forecasts as well as an increased cash burn versus our prior expectations. A key element of our lower profit outlook is our forecast for weaker profits in the U.S. Steel Europe operations, which had been a notable bright spot for the company as a whole over the trailing three years.Regardless, this downward adjustment comes after very strong 2018 results, which were supported by favorable metal margins and increased trade protection. However, the company faces an uphill battle on the cash generation front amid its ongoing $2 billion asset revitalization program. Additionally, we expect cash from operations will be pressured in the medium term as margins contract. We forecast a material decline in steel prices that will only be partially offset by lower raw material costs. Accordingly, positive free cash flow generation is not imminent. Although the company's financial health is much improved from just a few years ago, we are concerned that financial distress could emerge once again as market conditions weaken. Management has expressed an intent to pursue additional share repurchases as well as a greenfield EAF project, all concurrent with significant upcoming capital expenditures.
For 2019, we forecast $1.52 billion of adjusted EBITDA and adjusted earnings of $3.90 per share on $14.10 billion of revenue. For the seasonally weak first quarter, management guided to $225 million of adjusted EBITDA, which seems readily achievable, even if steel prices decline further. We forecast lower profits over the long term. Our adjusted EBITDA margin forecast falls to only 10% by 2023 (midcycle) versus our outlook of 11% in 2019 and realized margins of 12.4% in 2018. As such, we believe 2018 will ultimately represent a cyclical peak for the company's profitability.
United States Steel is a steel producer of flat-rolled and tubular products with production operations in the United States and Europe. The company is also engaged in railroad services and real estate operations. The company's segments are: North American Flat-Rolled, which produces slabs, strip mill plates, sheets and tin mill products; U. S. Steel Europe, which produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as heating radiators and refractory ceramic materials; and Tubular Products, which produces and sells electric resistance welded steel casing and tubing (known as oil country tubular goods), and standard and line pipe and mechanical tubing.
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