US Steel (X) Gains as Morgan Stanley Pounds the Table

Shares of US Steel (NYSE: X) are solidly higher Tuesday (+2.4%). In addition to vague takeover chatter in the market, Morgan Stanley analyst Evan Kurtz was out pounding the table on the stock.

Kurtz's listed four reasons to buy the stock as steel prices bottom:

1) Expectations have reset lower and guidance is achievable: US Steel lowered 2015 EBITDA guidance to $700-900m from $1.1-1.4b, removing a major overhang on the stock. While consensus continues to have doubts about the achievability of the new guidance, we believe it is realistic and attainable. Our $800m 2015 EBITDA estimate, at the midpoint of guidance, incorporates: $190m in new Carnegie Way savings, $200m in short-term savings, $186m in volume upside, a partial offset from a $695m price headwind, and ~$410m in estimated annualized one-time expenses in 1Q15 that will reverse. Among these one-time expenses are: ~$115m in higher year-on-year maintenance costs, ~$30m in extra mining costs due to seasonality, ~$15m in one-time accrual expenses primarily related to 2,800 layoffs implemented so far, and
~$20m in costs to achieve savings later in the year.

2) Shares are correlated with steel prices and industry utilization, both of which are set to improve: Flat-rolled steel prices are bottoming, imports are falling, industry capacity utilization is rising, and service centers are closer to ending destocking. With the industry inflecting positively, we think now is the right time to be long US Steel. The company will benefit from higher utilization in 2H15, which can be quite impactful due to operating leverage.

3) Flat-rolled trade cases or trade enforcement reforms would be additional positives: We anticipate a flat-rolled trade case filing in the near future involving cold-rolled and/or coated sheet. Imports from China, Korea, Turkey, and EU member states could be targeted. In addition to a near-term case, the possibility of US trade enforcement reforms that would make
antidumping cases easier to pursue represents a bull case option.

4) Iron ore prices reflating near-term: Iron ore prices have rallied and although we expect them to moderate in 2H15, they could persist near-term on stronger seasonal demand, Chinese stimulus, and peaking dollar strength (See Cross-Asset Dispatches: Reflation - The Force Awakens). Stronger iron ore will boost sentiment around US Steel, as it is vertically integrated.

The firm has refreshed their steel price deck and estimates. They expect hot-rolled coil to average $525/t in 2015 and $530/t in 2016.

Overweight price target of $35.00

For an analyst ratings summary and ratings history on US Steel click here. For more ratings news on US Steel click here.

Shares of US Steel closed at $25.58 yesterday.

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