U.S. Steel’s Valuation: Is It Getting Too Heated Up?
Defying Gravity: Decoding U.S. Steel Corporation's Current Rally
U.S. Steel’s valuation
Valuation multiples are a key metric that investors should look at. With the help of relative valuations, we can assess a company’s valuation with respect to its closest peers’ valuations. There are several valuation metrics that we can use in such valuations.
For companies in cyclical industries like steel, EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA. In this part of the series, we’ll look at U.S. Steel Corporation’s (X) forward EV-to-EBITDA.
U.S. Steel trading at a premium
The graph above shows U.S. Steel’s forward EV/EBITDA compared to its peer companies. As you can see, the stock is currently trading at a substantial premium to its peer companies. U.S. Steel has traded at even higher premiums to its peer companies during the 2009–2010 period, when the global markets limped back to normal after the financial crisis of 2008–2009.
U.S. Steel has higher operating as well as financial leverage as compared to some of its peer companies. Steel Dynamics (STLD) and Nucor (NUE) produce steel through electric arc furnaces that tend to have a lower fixed cost structure.
In contrast, U.S. Steel produces steel through traditional blast furnaces, which tend to have higher fixed costs. Operating leverage is a double-edged sword. Companies with higher leverage tend to outperform during cyclical upturns. However, when the cycle takes a turn for the worse, earnings of companies with higher leverage takes a beating.
There have been some recent signs of revival in the steel industry. In the next part of this series, we’ll explore how this could impact U.S. Steel Corporation.
Investors who want to avoid the work of picking individual stocks can also consider the SPDR S&P Metals and Mining ETF (XME). Currently, XME has invested almost half of its holdings in US-based steel companies. Together, Allegheny Technology (ATI) and Reliance Steel & Aluminum (RS) form 8.7% of XME’s portfolio
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