U.S. Steel Soars to Three-Year High
U.S. Steel Corp. (X) is benefiting from the rapid rise in worldwide steel prices, which is overcoming expensive raw material and operating costs. The Russia-Ukraine war has stoked buying interest, lifting the steelmaker to a three-year high. It’s posted extraordinary gains in the last seven weeks, rising 79% into the low 30s, so prospective buyers may wish to sit on their hands and wait for a pullback to new support in the mid-20s.
Robust Pricing vs Rising Costs
Analysts have been raising targets in recent weeks but the stock is still valued well below the SP-500 multiple of 19 times forward earnings due to the common view that steel production will hit a profit wall in 2023. As a result, U.S. Steel is valued at less than three times earnings at most investment houses, despite supply disruptions due to the war. This follows a bewildering Wall Street theme that Ukraine is a temporary blip in an otherwise bullish market environment.
Morgan Stanley analyst Carlos de Alba upgraded the stock to ‘Equal Weight’ last week, noting that “escalation of the Ukraine/Russia conflict has prompted a sharp increase in steel metallic prices, including scrap/pig iron. Directly or indirectly we see higher raw material cost inflation for steel names under our coverage. We think U.S. Steel is likely to cope better than peers given its vertical integration into iron ore and comparatively less exposure to electric arc furnaces”.
Wall Street and Technical Outlook
Wall Street consensus stands at a mediocre ‘Hold’ rating based upon 5 ‘Buy’, 1 ‘Overweight’, and 5 ‘Hold’ recommendations. In addition, three analysts recommend that shareholders close positions. Price targets currently range from a low of $23 to a Street-high $50 while the stock is set to open Wednesday’s session less than $2 below the median $34 target. This mid-range placement suggests that U.S. Steel is fairly valued at this time.
U.S. Steel hit an all-time high in 2008 and entered a long-term downtrend, carving lower highs in 2010, 2011, and 2018. It fell to an all-time low in single digits during 2020’s pandemic decline and turned higher, stalling at the .618 Fibonacci retracement of the 2018 – 2020 selloff in May 2021. Aggressive buyers returned after the stock posted a 10-month low in January 2022, ahead of a vertical rally impulse that’s now stretched above the prior peak. Accumulation has surged to a new high at the same time, predicting continued upside into the upper 30s.
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Disclosure: the author held no positions in aforementioned securities at the time of publication.