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Credit Suisse Sees 26% Upside In U.S. Steel

Credit Suisse Sees 26% Upside In U.S. Steel

United States Steel Corporation’s (NYSE: X) 2Q16 figures reflected a steep decline in unit costs, which could result in “a meaningful rerating of medium term earnings and FCF power,” Credit Suisse’s Curt Woodworth said in a report. He reiterated an Outperform rating on the company, with a price target of $29.

US Steel’s 2Q cash costs were significantly lower than expected, mainly due to “strong utilization rates in Europe and benefits from footprint rationalization in the US,” analyst Curt Woodworth mentioned. He believes these lower costs are sustainable. US Flat Rolled total unit costs declined by $100/ton y/y.

Cost Reduction Benefits More Than ASP Upside

US Steel indicated that at the current price levels, its 2016 EBITDA would reach $850mm. This translates to an annualized run-rate of $1.6 billion in the back half of the year, “despite trough tubular EBITDA and a cyclical low for auto contract prices,” Woodworth noted.

Related Link: U.S. Steel Beats Estimates; Axiom's Johnson Fears Fundamentals Are Being Ignored In Steel Names

Although spot prices could moderate from current levels, US Steel is likely to benefit from further unit cost savings through Project Carnegie gains. “On a blue sky basis, assuming tubular at breakeven and annual contracts reset up $70/ton (the CS 2017 forecast), we derive annualized EBITDA levels of $2.1bn at spot prices,” the analyst stated.

Increasing Estimates

The EBITDA estimate for 2016 has been raised from $775mm to $815mm, reflecting better unit costs in the US and Europe. The EBITDA estimate for 2017 has been raised from $1.3bn to $1.4bn, reflecting lower conversion costs.

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