Credit Suisse Downgrades US Steel Ahead Of 'Sheet Tsunami'

United States Steel Corporation X investors haven’t received the boost they had hoped for from President Donald Trump’s tariffs on steel imports. Unfortunately, one Wall Street analyst says things will only get worse from here for U.S. Steel.

The Analyst

Credit Suisse analyst Curt Woodworth downgraded U.S. Steel from Neutral to Underperform and cut his price target from $21 to $13.

The Thesis

As the price of hot-rolled coil steel falls over the next several years, U.S. Steel simply doesn't have the ability to maintain its current earnings nor valuation, according to Woodworth. Credit Suisse is calling for HRC prices to average $710/t in 2019 and 2020 in a market that Woodworth said is “above mid-cycle.”

“In this report we perform deep dive analysis on US Steel Flat Rolled segment and conclude the step-function rise in unit costs the past several years coupled with loss of automotive share suggests X is in a weaker competitive position versus peers entering the ‘Sheet Tsunami’ period in the US from 2021-2022,” Woodworth wrote in a note.

The Sheet Tsunami refers to a flood of new low-cost U.S. steel production capacity that will come online in the next several years that Woodworth predicts will drive HRC prices down to the $610/t level by 2022. U.S. Steel has ramped up its Flat Rolled capex from $111 million in 2016 to $820 million in 2018, yet Woodworth says free cash flow delta is negative $1.25 billion over that two year stretch.

Price Action

U.S. Steel's stock traded lower by 4.7 percent to $18.82 per share on Tuesday following the downgrade.

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