Bank Of America Upgrades US Steel To Neutral

Bank of America Merrill Lynch analysts Timna Tanners and PT Luther have upgraded United States Steel Corporation X shares to a Neutral rating from Underperform, citing increased expected benchmark sheet prices. The brokerage has a new price objective of $18.00 on the shares of the company.

The analysts have raised estimated benchmark sheet prices $45 to $530/t avg for the year 2016. They have also lifted their estimated average benchmark hot rolled coil (HRC) to $530/short ton for the year from $485. The confidence is due to an anticipated "more moderate drop from recent steel prices"; the brokerage thinks the move will reflect a peak.

Related Link: Credit Suisse Upgrades Steel Stocks On Increasing U.S. Steel Prices

In a note to clients, Bank of America Merrill Lynch also pointed out that "sheet markets have tightened, with buyers on allocation for coated steels." However, contacts indicated the brokerage that the import offers have become increasingly attractive, albeit for arrivals no earlier than year end.

"X's recent refinancing of its balance sheet delays maturities and removes that liquidity risk overhang. In addition, our new steel price assumption results in better EBITDA for 2016E and 2017E as quarterly and annual contract prices benefit on a lagged basis. While management guided to about $400 million EBITDA for 2016E we now model $673 million, up from $424 million consensus," according to the two analysts.

The brokerage indicated that its Monday night dinner with steel buyers had a more bullish tone than it expected. The interesting part of it was that a few buyers forecasts that mills could raise prices further. However, most of them see near-term strength sustaining. Therefore, the analysts think that a lull in the U.S. steel market was attributed to typical summer softness.

At time of writing, US Steel was up 8.05 percent at $17.66.