Why U.S. Steel Could Gain 50%

U.S. Steel (X) has gained more than 50% during the past six months but Nomura’s Curt Woodworth and Alexander Burnes think it could gain another 50%. They explain why:

Emile Wamsteker

If we normalize for lumpy maintenance expense in 2H of 2014 and annualize back half performance, U.S. Steel is at an annual EBITDA run-rate of $2.0bn and EPS of $5.00 normalizing for a tax rate of 35% even though U.S. Steel's recent tax rate has been well below this level. We believe that with additional cost reduction efforts in 2015 coupled with accretive capital deployment into EAF and/or DRI, U.S. Steel should be able to achieve mid-cycle EPS near $6.00 in 2015E. Our 2015E EPS estimate is $5.35, based on a 25% tax rate. We believe a fair mid-cycle multiples for U.S. Steel are 10x P/E and 6.0x EV/EBITDA, both of which would equate to a $60 share price. Including the benefits of deleveraging, we note that U.S. Steel would trade at only 4.5x our pension-adjusted 2016E EV/EBITDA at our $55 TP. U.S. Steel currently trades at a FCF yield of 13% in 2015E and 11% in 2016E, which we find compelling.

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At yesterday’s close of $40.08, that leaves 50% of upside to $60 and a hefty 37% to Nomura’s price target of $55.

After gaining 5.1% yesterday following a surprisingly strong earnings report, U.S. Steel has dropped 1.1% to $39.62 at 11:09 a.m. today, while AK Steel (AKS) has dropped 1.7% to $7.28 and ArcelorMittal (MT) has fallen 1.8% to $12.73.