X - Valens Credit Report - 2018 09 10
CDS markets are overstating X's credit risk with a CDS of 240bps relative to an Intrinsic CDS of 103bps, while cash bond markets are grossly overstating credit risk with a YTW of 6.508% relative to an Intrinsic YTW of 3.918%. Furthermore, Moody's is grossly overstating the firm's fundamental credit risk, with their highly speculative, high-yield B1 credit rating nine notches lower than Valens' IG3+ (A1) credit ratingFundamental analysis highlights that X's cash flows alone would exceed all obligations including debt maturities in each year through 2024. Additionally, X boasts a robust 343% recovery rate on unsecured debt, which should facilitate access to credit markets should they need to refinance
Incentives Dictate Behaviorâ„¢ analysis highlights that management is likely to be focused on improving all three value drivers for the company: sales, margins, and asset utilization. This should drive Uniform ROA improvement and lead to increased cash flows available for servicing obligations going forward. Also, management members own material amounts of X equity relative to their average annual compensation, indicating that they are likely well-aligned with shareholders for long-term value creation
X currently trades at valuations well below UAFRS-based (Uniform) Assets, with a 0.5x Uniform P/B (V/A'). At these levels, the market is pricing in expectations for Uniform ROA to remain muted at current 2%-3% levels through 2022, accompanied by 1% Uniform Asset shrinkage going forward. Given that valuations are likely being compressed by the market's inaccurate perception of the firm's credit risk, X could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement. Moreover, at current levels, equity downside is likely limited, as asset values begin to offer a floor to valuations at these levels
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.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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