Contrarian View: Buy U.S. Steel Following 'Abysmal' Q1

There’s an old Wall Street adage that says the best time to buy is when there’s blood in the streets. For United States Steel Corporation X investors, the streets have gotten pretty darn bloody.

U.S. Steel’s share price is now down 38.6 percent in the last three months after the company reported Q1 earnings that were disappointing to say the least. However, Jefferies analyst Seth Rosenfeld says investors should step in and buy U.S. Steel on the dip despite what he calls an “abysmal” quarter.

According to Rosenfeld, things can’t get much worse for U.S. Steel than they did in Q1.

“We underestimated elevated risks inherent with X’s ‘revitalization’ efforts as well as cost headwinds in 1Q17 and shares have hastily sold off post results/guide as bullish sentiment capitulated,” he explained.

Related Link: U.S. Steel Has Now Given Up Almost All Of Its Trump Gains

Jefferies gives three reasons why U.S. Steel is now a bargain:

• 1. The company’s guidance suggests earnings upside ahead.
• 2. The majority of negative operational headwinds have now passed.
• 3. Quarter-over-quarter cost increases will be minimal.

Rosenfeld said improvements in flat rolled price-volumes should produce quarter-over-quarter EBITDA growth of $229 million in the coming quarter compared to just $9 million in Q1.

While Jefferies was forced to cut its full-year EBITDA estimates by $555 million to $1.120 billion, Rosenfeld points out that U.S. Steel is now trading at a valuation discount compared to both its U.S. steel peers and its historical market valuation.

Jefferies maintains a Buy rating on U.S. Steel but has cut its price target for the stock from $50 to $29.