U.S. Steel: Another Day, Another Upgrade

U.S. Steel (X) had been down so long, it was starting to look like nothing would ever lift it up.

Reuters

Then the upgrades started coming, and shares of U.S. Steel started to run. Its shares have returned 44% during the past three months, outpacing Commercial Metals Company’s (CMC) 21% gain, Steel Dynamics (STLD) 18% rise, and Nucor’s (NUE) 9.7% advance .

And wouldn’t you know it, here’s another upgrade, this time from KeyBanc, propelling shares higher today. KeyBanc’s Philip Gibbs and Tyler Kenyon explain why they like U.S. Steel:

In our late October report on X, we noted the Company was “scratching the surface” on operational improvement, and we expected shares to edge higher over the near term. While X shares have appreciated by 16% since that report vs. the S&P 500 of +4% and the [Market Vectors Steel ETF (SLX)] of +3%, we believe shares have more room to run based on our positive carbon hot-rolled steel pricing revisions for 2014: meaningful raw material cost tailwinds (coal, scrap, iron ore); low Street EPS and EBITDA expectations for 2014-2015; an ever-increasing interest rate environment (benefits for pension exposure); more evidence of European macro stability; and above-average likelihood of incremental operational efficiency announcements such as a joint venture or tolling agreement with Allegheny Technologies Incorporated (ATI).

Gibbs and Kenyon raised U.S. Steel to Buy from Hold and expect it to earn $2.05 in 2014, well ahead of the consensus estimate of $1.21.

While Gibbs and Kenyon are bullish on U.S. Steel, They’re not nearly as positive on Commercial Metals Company, Nucor and Steel Dynamics. They explain why:

Commercial Metals Company, Nucor Corporation, and Steel Dynamics, Inc. are more in line with Street estimates to reflect our expectation for early 2014 metal spread compression vs. late 2013 levels as scrap costs have run more aggressively than underlying steel pricing realizations over the last 60-90 days. More specifically, January ferrous scrap costs are anticipated to rise $15-$45/long ton month-over-month vs. our previous expectation of +$5-$10. We expect the upside to be short-lived post-January as the recent rise was predicated by a combination of supply-side constraints via late 2013 weather conditions and upstream suppliers withholding supply from the market to make up for a dismal 1H13. Moreover, U.S. ferrous scrap prices now appear overvalued vs. seaborne iron ore, a condition we expect to unwind in mid-2014 as scrap flows improve with a better economy, seaborne iron ore prices weaken, and impacts from [Nucor's] late 2013 DRI commissioning foster a ceiling for higher end ferrous scrap.

Shares of U.S. Steel have gained 5.2% to $31.02 today at 11:17 a.m., while Commercial Metals has dropped 0.5% to $20.22, Allegheny Technologies has dropped 0.6% to $35.43, Steel Dynamics has declined 0.3% to $19.48 and Nucor is off 0.2% to %53.27.