One of Wall Street's worst performers of the day is United States Steel, whose shares have slumped -5.1% to a price of $23.93 and are now 10.91% below their average analyst target price of $26.86.
The average analyst rating for the stock is hold. X underperformed the S&P 500 index by -6.2% as of today's overnight session, but outpaced it by 11.6% over the last year with a return of 3.1%.
United States Steel belongs to the basic materials sector, which includes the chemical, coal, mining, aluminum, and steel industries. The demand for these materials is dependent on economic cycles: when the economy is growing, companies across all sectors ramp up production, which increases demand from basic materials companies.
Conversely, when the economy slows down, demand for these materials decreases. The stock prices of this sector tend to follow the ebbs and flows of these demand cycles -- but accurately predicting where we are presently in the economic cycle is a matter of intense debate.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US basic materials companies is 8.77, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
United States Steel's trailing 12 month P/E ratio is 1.4, based on its trailing Eps of $17.31. The company has a forward P/E ratio of 8.1 according to its forward Eps of $2.94 -- which is an estimate of what its earnings will look like in the next quarter.
Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. United states steel 's year on year (YOY) quarterly earnings decreased at a rate of -3.1% while its YOY quarterly revenue grew at a rate of 25.2%. Since earnings are growing at a slower rate than revenue, the company's profit margins are shrinking as a result of increases in the their tax liabilities, decreasing product prices, an increase in overhead, or a rise of the cost of goods sold.
In contrast with earnings, gross profits are calculated on the basis of the company's cost of goods sold (i.e. cost of labor and materials only) subtracted from sales revenues. Significant gross profit margins shed light on how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In X's case, the gross profit margins are 29.9%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market.
Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in United States Steel's levered free cash flow of $2,192,875,008. With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in X have received an annualized dividend yield of 0.6% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). United States Steel 's P/B ratio of 0.6 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Basic Materials sector was 1.85 as of the second quarter of 2022.
As of second quarter of 2022, United States Steel is likely fairly valued because it has a very low P/E ratio, an exceptionally low P/B ratio, decent profit margins, an analyst consensus of some upside potential, and strong cash flows. We hope this preliminary analysis will encourage you to do your own research into X's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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