At the dawn of the 20th century, U.S. Steel (NYSE:X) was the world’s most powerful company, the first one to be worth $1 billion. As recently as 2008, the stock was worth over $186 per share.
U.S. Steel stock will open for trade April 10 at under $18 per share, after another fall of 10% that some traders may see as a “buy” level, but long-term investors should recognize for what it is — a bear trap.
The cave of this bear looks very cozy. The price-to-earnings ratio of the stock right now is 2.84. It had $6.25 per share of earnings last year, as tariffs on imported steel forced buyers to take its sheet. Revenues were up nearly 16% — after a 19% gain the previous year — to $14.18 billion. The market cap is $3 billion, meaning it trades like JC Penney (NYSE:JCP) while performing like Alphabet (NASDAQ:GOOGL).
What Could Go Wrong?
The difference between US Steel and Google is that demand for steel has peaked, while demand for data keeps rising.
Developing economies see steel the way your grandfather saw gold. In countries like China, steel represents independence — and power. Nations feel they must have steel to prove they are nations, so many countries make it.
But demand has leveled off. U.S. Steel itself is worried about its European operations, even while tariffs keep the price of steel here high. Demand in China is contracting. The primary market for sheet steel is in making cars, and car builders today want lighter vehicles which means, in the words of The Graduate, “plastics“.
Then there is technology. Coal and iron ore aren’t the only way to make steel. You can also make new steel from old steel. That’s what Nucor (NYSE:NUE), now the largest U.S. steel producer, does. The third-largest, Steel Dynamics (NASDAQ:STLD), was founded by former Nucor executives.
U.S. Steel hasn’t kept up with technology. It makes steel the old-fashioned way. It does seek ways to reduce costs, which is why it now wants to frack for natural gas under one of its mills.
This makes sense. Pennsylvania was the home of the U.S. oil industry during the Civil War. It was this energy, along with iron ore from Minnesota, that made the steel industry blossom in Pittsburgh, while staining the sky black.
Neighbors are not amused. Pittsburgh has spent 50 years bringing its air and water back, becoming a medical technology and headquarters town. Folks aren’t anxious to go back.
Oceans Rise, Empires Fall
Analysts can read the trends, and those at Credit Suisse Group (NYSE:CS) are unequivocal.
Get out of U.S. Steel. Analyst Curt Woolworth has cut his rating on U.S. Steel stock twice this year, to “underperform” and now sees a “sheet tsunami” in the form of low-cost, hot-rolled coil focused sheet steel hitting the U.S. market in 2021 and 2022.
This will cut prices from $700 per ton to $610 per ton. Since, even in good times like last year, U.S. Steel had operating income of $950 million on that $14.18 billion of revenue, about 6.6%, its profits could be wiped out.
The Bottom Line on U.S. Steel Stock
The latest fall in U.S. Steel stock means it is, in technicians’ terms, “oversold“.
Based on any rational metric, like its PE ratio or sales, the stock is dirt cheap.
The tell is the dividend, which is 5 cents per share. It hasn’t changed since 2009. Despite having $1 billion in the bank, and a debt-to-assets ratio of 20%, the dividend isn’t changing.
U.S. Steel managers can read a weather forecast and are battening down the hatches.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.