X - Valens Credit Report - 2022 07 20
Credit markets are grossly overstating X's credit risk with a cash bond YTW of 9.266% and a CDS of 709bps, relative to an Intrinsic YTW of 5.184% and an Intrinsic CDS of 223bps. Meanwhile, Moody's is materially overstating the firm's fundamental credit risk, with its highly speculative Ba3 credit rating five notches below Valens' IG4+ (Baa1) credit rating.Incentives Dictate Behavior™ analysis highlights mixed signals for credit holders. X's compensation framework incentivizes management to improve all three value drivers: sales, margins, and asset utilization, which should drive Uniform ROA improvement and lead to increased cash flows available for servicing obligations going forward.
Earnings Call Forensics™ of the firm's Q1 2022 earnings call (4/29) highlights that management generated an excitement marker when saying fixed cost for ore and coal, combined with higher demand and spot prices, should contribute to meaningful EBTIDA improvement. In addition, they are confident they have diversified their iron and ore sources, and that their infrastructure strategy is increasing their strength domestically.
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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