On Wednesday, U.S. Steel (NYSE: X) reported first quarter earnings and it wasn’t pretty. Investors reacted by dumping the stock as fast as they could. By noon, the stock was down 25% and by the closing bell, it had slumped by 27%. In other words, investors left U.S. Steel stock out to dry.
But is this drop in share price a buying opportunity for investors? As I like to buy stocks on discount, this big pull back interested me to look more into the company. Unfortunately what I found was not that encouraging. Below is my take on U.S. Steel and why you should stay away.
U.S. Steel Background
U.S. Steel was founded in 1901 by J. P. Morgan and Elbert H. Gary. In doing so they combined Carnegie Steel Company, Federal Steel Company, and National Steel Company. For many years, the company was the largest steel producer and largest corporation in the world.
In the early 1980’s, steel firms were awarded tax breaks from the government in order to deal with imported steel, mainly from China. However, instead of reinvesting money and modernizing their mills, steel companies put their capital into more profitable industries.
As an example, U.S. Steel bought Marathon Oil. In doing so, the company saved close to $500 million in taxes. This is just one of the many ways companies and investors can save on taxes through investing.
In the late 1990’s steel prices remained low due to cheaper foreign steel. As a result, U.S. Steel saw the majority of its revenue and net income come from Marathon Oil. In 2001, the company sold off Marathon Oil to focus solely on steel.
U.S. Steel Earnings And Outlook
For the first quarter, U.S. Steel reported an increase in revenue of 16%. However, they reported a loss of $180 million or $1.03 per share. This spooked investors who were on the fence about this stock, but then when the company slashed its outlook for 2017 in half, that is when many other investors fled as well.
What’s Wrong With U.S. Steel?
So what happened to this company? There are a handful of reasons that led to this selloff.
Hope and Dreams. When President Trump was elected, the steel industry rejoiced. They expected a large increase in infrastructure spending. Investors too were giddy with excitement. For 2016, the stock was up 300%!
But as this hope for new infrastructure spending has faded, so has the excitement.
Poor Management. Steel prices have been in the gutter for a while now. As a result, it is hard to make money and grow a company. All steel companies, including U.S. Steel were affected. But when steel prices bottomed, other steel companies took that time to upgrade their equipment and mills and reinvest in the business.
U.S. Steel chose not to do this. Instead, they focused on pushing for tariffs on steel imports. Now that steel prices are rebounding, U.S. Steel has a problem.
The companies that did take the time to reinvest money to improve operations are taking advantage of rising steel prices. But U.S. Steel is facing higher production costs because of their old equipment. So while rivals are making money, U.S. Steel is barely treading water.
What Does U.S. Steel Have Going For It?
With all of the bad news, what does this company have to look forward to? First off, higher steel prices are a help. While the company won’t be making as much as its rivals, it can at least make some money.
Second, Europe is a bright spot for the company. They are seeing growth there and are focusing more attention to that region. Of course, there is some potential bad news here too. If President Trump starts adding tariffs to imports, you can bet that other countries will too, only adding to the cost to do business for U.S. Steel.
My Take: Stay Away
While a 27% pull back on a stock warrants a deeper look, my detective works leaves me not wanting to touch this stock. There are too many issues. Namely, the fact that they never reinvested in the company to improve their mill and update equipment. Now with steel prices rebounding, they are going to want to try to make money as opposed to reinvesting it back into the company.
This means they will wait until the next pull back in steel prices to hopefully reinvest. Who knows how long this could be.And given how they continue to push this need off, no one can be sure they ever will reinvest money for upgrades.
As a result, I can’t recommend investing in U.S. Steel. I feel as though they are just going to be treading water for many years to come, unless something drastic happens. And drastic things are never good for investors in a stock.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.