Morningstar | U.S. Steel Shares Rally on 1Q Earnings Release but Massive Reinvestment Outlays Now Even Larger. See Updated Analyst Note from 03 May 2019
U.S. Steel shares rallied sharply higher toward our fair value estimate after the company's first-quarter earnings release. However, although adjusted EBITDA rose 12% versus the prior-year period, management expects no sequential improvement in the second quarter and the company's reinvestment outlays will remain sky high over the next few years. Therefore, we see limited additional upside on a risk-adjusted basis. Having updated our valuation model to reflect the implications of the newly announced $1.2 billion Mon Valley investment, our U.S. Steel fair value estimate falls to $19 per share from $21. Our no-moat rating is unchanged.The ongoing asset revitalization program can be considered a necessary evil given the relative old age and unfavorable cost position of the company's existing blast furnace fleet. However, in addition to the sizable Mon Valley project, the company's growth capital expenditures plan also includes a $280 million electric arc furnace in Fairfield, Alabama, and a new $130 million line in Slovakia, among other projects. For those who believe current market conditions will prove sustainable over the long run, the notion that these projects will prove value-accretive is reasonable. However, we maintain a negative outlook for steel prices and metal spreads. We contend that both are likely to decline from current levels over the long run for U.S. Steel. This weighs on our our enthusiasm about potential returns from the company's reinvestment program.
With 2018 looking more and more like a cyclical peak for the U.S., we remain concerned about the bevy of capacity expansions and additions announced by U.S. Steel's competitors. Absent a material increase in steel demand, which we view as highly unlikely, the new capacity can only provide downward pressure on product prices. This dynamic has seemed to play out far too often historically during heady times for the U.S. steel industry, and we fear it will take hold once again this time around.
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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