United States Steel Corp (X, Financial) has been making headlines with a daily gain of 3.37% and a 3-month gain of 34.54%. Its Earnings Per Share (EPS) stands at 5.2. However, the question that remains is whether the stock is modestly overvalued? This article aims to answer this question through an in-depth analysis of the company's valuation. Read on to get a detailed understanding of United States Steel's intrinsic value.
Company Introduction
United States Steel Corp operates primarily in the United States but also has a steelmaking capacity in Slovakia. It primarily serves North American customers in the service center, conversion, transportation, construction, container, and appliance, and electrical markets. The company's current stock price stands at $31.56. However, the GF Value, an estimation of the fair value, is $24.62. This comparison suggests that United States Steel's stock might be modestly overvalued.
Understanding GF Value
The GF Value is a proprietary calculation that represents the current intrinsic value of a stock. It is derived from historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, the stock of United States Steel (X, Financial) is estimated to be modestly overvalued. This suggests that the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. United States Steel has a cash-to-debt ratio of 0.7, which is better than 63.28% of 591 companies in the Steel industry. GuruFocus ranks the overall financial strength of United States Steel at 7 out of 10, which indicates that the financial strength of United States Steel is fair.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. United States Steel has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $19 billion and Earnings Per Share (EPS) of $5.2. Its operating margin is 7.4%, which ranks better than 66.39% of 601 companies in the Steel industry. Overall, the profitability of United States Steel is ranked 5 out of 10, which indicates fair profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of United States Steel is 0.3%, which ranks worse than 80.92% of 587 companies in the Steel industry. The 3-year average EBITDA growth is 104.2%, which ranks better than 94.12% of 510 companies in the Steel industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, United States Steel's return on invested capital is 8.58, and its cost of capital is 12.77.
Conclusion
In summary, the stock of United States Steel (X, Financial) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 94.12% of 510 companies in the Steel industry. To learn more about United States Steel stock, you can check out its 30-Year Financials here.
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