Citi Turns Bullish On US Steel After 25% Sell-Off

United States Steel Corporation X has seen its stock fall 25 percent in recent weeks, which creates a good opportunity for investors to buy the stock, according to Citi.

The Analyst

Citi's Alexander Hacking upgraded U.S. Steel's stock rating from Neutral to Buy with a price target lifted $43 to $46.

The Thesis

U.S. Steel's stock lost around one-quarter of its value while iron ore prices simultaneously trended lower, Hacking said in a research report. But the stock is now trading at an attractive valuation, with a 10-percent free cash flow yield in 2018 and 2019 that could move "considerably higher" in 2020 and beyond, the analyst said. 

U.S. flat rolled prices have moved higher in reaction to 232 tariffs, but prices could peak as new countries and products are exempted from the tariff and new domestic supply comes to the market, Hacking said. In the meantime, steelmakers will enjoy a "period of windfall profits" that could contribute hundreds of millions of dollars to their balance sheets, he said.

This represents a "very bullish catalyst" for U.S. Steel similar to what was seen with met coal and iron ore equities in 2017, according to Citi. 

Agreement Reached With Governments

U.S. Steel said in a Monday release it reached an agreement with the state of Indiana and the federal government to resolve water violations at its Midwest Plant in Portage, Indiana. As part of the agreement, U.S. Steel's plant in Indiana will "undertake substantial measures" to improve its environmental standards with the objective of "safeguarding the community and our shared natural resources."

The Pittsburgh-based company will pay almost $900,000 in fines as part of the agreement, which comes after a 2017 chromium spill in a Lake Michigan tributary, according to the Chicago Tribune. 

Price Action

Shares of U.S. Steel were trading higher by nearly 4 percent Tuesday morning.

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