One of Wall Street's biggest winners of the day is United States Steel, a steel company whose shares have climbed 3.7% to a price of $30.32 -- 12.38% above its average analyst target price of $26.98.
The average analyst rating for the stock is hold. X outperformed the S&P 500 index by 4.9% during today's afternoon session, and by 38.8% over the last year with a return of 31.7%.
United States Steel Corporation produces and sells flat-rolled and tubular steel products primarily in North America and Europe. The company is included in the basic materials sector, which groups together the steel, coal, precious metals, chemical, and copper industries. From miners to producers, what these companies have in common is a strong correlation between their stock price and the strength of current economic conditions.
This is why basic materials companies are considered to be cyclical stocks. A well-timed investment at the beginning of an economic upswing can offer strong returns, but investing during a downturn may result in months or even years of mediocre performance.
United States Steel's trailing 12 month P/E ratio is 2.5, based on its trailing EPS of $12.13. The company has a forward P/E ratio of 16.3 according to its forward EPS of $1.86 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the basic materials sector has an average P/E ratio of 8.57, and the average for the S&P 500 is 15.97.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
United States Steel's PEG ratio of 1.65 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of United States Steel's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies 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.
X's gross profit margins have averaged 12.3% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are increasing strongly based on their four year average gross profit growth rate of 667.4%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From United States Steel's last four annual reports, we are able to obtain the following rundown of its free cash flow:
|Cash Flow from Operations ($ MM)
|Capital expenditures ($ MM)
|Free Cash Flow ($ MM)
|YoY Growth (%)
- Average free cash flow: $690,000,000.00
- Average free cash flown growth rate: 323.4 %
- Coefficient of variability (the lower the better): 318.4 %
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 0.7% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
United States Steel's P/B ratio of 0.7 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 1.86 as of the third quarter of 2022.
United States Steel is by most measures undervalued because it has a very low P/E ratio, an exceptionally low P/B ratio, and irregular cash flows with an upwards trend. The stock has mixed growth prospects because it has a a PEG ratio of less than 1 and weak operating margins with a negative growth trend. We hope you enjoyed this overview of X's fundamentals.