Published: July 7, 2010
The market has been in a nosedive the past few weeks and
many investors are getting scared. Instead of being afraid,
investors should use the recent market dip to take advantage of
the opportunity to buy shares of solid companies on sale.
I think investors should turn their attention to the basic
materials sector, which is one of the most undervalued sectors
in the market today. The Steel & Iron sector is down -30.75%
during the past 3 months. Steel stocks have been hammered with
competitors AK Steel (NYSE: AKS), Mittal Steel (NYSE:
MT) and Nucor (NYSE: NUE) hitting their 52 week lows
this past week.
But rather than chasing gold stocks trading near their 52-week
highs, another, less shiny metal looks far more intriguing...
I'm referring to steel, specifically, steel company stocks.
Steel manufacturing companies were beaten down during the lows
of 2009 and many of these stocks still trade at significant
discounts to their
fair value. Now that the economy is gradually
recovering, steel companies stand to benefit from the return of
global demand to the sector.
My favorite pick in this sector is United States Steel
Corporation (NYSE: X), the nation's largest integrated steel
producer. U.S. Steel has always been an industry stalwart, but
due to the cyclical nature of the steel industry, the company
fell on tough times during the recession. This caused the
company to report massive losses during 2008 and 2009. But
things are looking up for U.S. Steel, as losses are decelerating
and profitability is on the horizon.
The biggest threat to the steel industry is a protracted
recession leading to lower than expected consumer demand from
automobile manufacturers and construction companies. Another
threat is China, which has been building up large amounts of
steel inventory and is gaining greater pricing power in the
But U.S. Steel has a leg up on the competition.
Since nearly 70 cents of every dollar is spent on material
costs, controlling raw materials costs is key for survival in
the industry. This is what separates U.S. Steel from the herd.
The firm has lower material costs than many competitors because
it controls its own raw material suppliers through its domestic
iron ore mines. Competitors don't control their own raw
materials supply are forced to pay spot prices, which have more
than doubled in the past year.
The company operates in the United States, Canada and Europe
in three basic segments: flat rolled, tubular and USS Europe.
All three segments have been improving operating efficiency
based on cost cutting and increasing operating margins.
The global recession hit U.S. Steel's earnings pretty hard
during the past two years, with the company losing more than
-$11 a share last year alone. But things appear to be turning
Last quarter, U.S. Steel posted $3.9 billion in revenue, an
increase of +42% during last year. Analysts were expecting a
loss of $1.43 a share for the quarter, but the company beat
expectations, only losing -$1.10 a share. The company is
forecasting a return to profitability for the current quarter
with a profit of $0.59 a share.
U.S. Steel expects the quarterly profit to not simply be a
one-off event. For the full year, it expects to earn $2.19 a
share and revenue is expected to grow more than +60%
Action to Take --> U.S.
Steel looks really cheap. The average
EPS estimate for U.S.
Steel in 2011 is $5.94, which means the stock is trading at a
very attractive 7.4 times estimated earnings. This is incredibly
low for an industry that trades for 16.8 times earnings on
The company has one of the best balance sheets in the entire
industry, with 1.4 billion in cash and $9.67 in cash per share.
Earnings are expected to grow +30% annually during the next five
years, nearly twice the industry average of +16%. Even if
earnings come in at the low end of estimates, U.S. Steel would
still be trading at just 8 times next year's earnings. Investors
in the stock are getting a blue chip company with great growth
potential for pennies on the dollar.
-- Mark Riddix