Vertical Group Downgrades US Steel (X) to Sell; Upside Priced In
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(Updated - March 13, 2018 8:11 AM EDT)
(updated to add analsyt comments)
Vertical Group analyst Gordon Johnson downgraded US Steel (NYSE: X) from Hold to Sell with a $23 price target, saying they see most of the upside priced in.
Johnson said an expected shift in steel consumer sentiment could mean the section 232's upside to US HRC price is over... and, based on updated guidance + how multiples behaved 'last time', it may be over for X too.
To wit... "With uncertainty from the Section 232 now largely removed after Trump’s 3/8 decision, we believe investors are shifting focus to how much of the desired benefits from the 232 could actually pass through to co. earnings. But, considering: (1) a growing list of country/product exclusions (see here, here, & here), which may eventually rival the >700 exclusions granted during the Section 201 tariffs in ’02, thus prompting a resurgence in imports, albeit w/ a lag, (2) our checks with service centers that, in the aftermath of the 232 decision, increasingly describe the tariffs as a “watered-down talking point”, implying steel consumer sentiment is becoming less bullish (a dynamic we expected after analyzing the negative effects of the Section 201 tariffs on job growth in aircraft mfg., natural resources, mining, & oil/gas extraction during ‘02/’03 [Ex. 1] – i.e. in comparing steel output to “true” steel demand [defined by the WSA; link], most major steel-producing nations put out more steel than they consume, but the US is a glaring exception [Ex. 2], implying higher costs for a broad range of mfrs.), (3) X’s updated ’18 EBITDA guide was weaker than we expected (i.e. after earlier discussions with mgmt., we estd. a restart at Granite City would lead to a ~$224mn increase to X’s ’18 EBITDA guidance [assuming half-yr. production of 600Kt], based on numbers detailed in Ex 3, but the updated guide released yesterday implies an increase of $200mn, or 11% below our est.), & (4) X’s forward EV/EBITDA multiple before/after the Section 201 tariffs in ‘02/’03 (using actual fwd results as we were unable to procure Cons. ests.) peaked in 4Q01 & trended lower thru 2Q03 (i.e. nearly the full duration of the 201 – Ex. 4), we believe the realized upside to steel co. earnings could underwhelm. Therefore, we believe the upside to US HRC prices and steel stocks is largely behind us
and, as a result, downgrade X from Hold to Sell."
Shares of US Steel closed at $43.57 yesterday.
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