X - Valens Credit Report - 2023 05 26
Credit markets are materially overstating X's credit risk with a YTW of 7.670% relative to an Intrinsic YTW of 5.453%, while CDS markets are grossly overstating X's credit risk with a CDS of 476bps relative to an Intrinsic CDS of 201bps. Meanwhile, Moody's is materially overstating the firm's fundamental credit risk, with its speculative Ba3 credit rating five notches below Valens' IG4+ (Baa1) credit rating.Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Management's compensation metrics should drive them to focus on all three value drivers: asset efficiency, margin expansion, and growth, which should lead to Uniform ROA expansion and increased cash flows to service debt obligations. In addition, CEO Burritt is a material holder of X's equity indicating he is well aligned with shareholders for long-term value creation.
Earnings Call Forensics™ of the firm's Q1 2023 earnings call (4/28) highlights that management is confident they are delivering on their transformative strategic projects, they remain on track and on budget with transformation initiatives and are benefiting from strong trade enforcement by the U.S. government. In addition, they are confident they can position their mini mill segment to produce over $1 billion of annual through cycle free cash flow by 2026, that their extremely low leverage provides flexibility, and that that their tubular segment continues to see strong demand.
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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