United States Steel Corporation (X), Cliffs Natural Resources Inc (CLF): Is the Steel Industry Finally Worth a Look?

Virtually any company involved in the steel industry has performed terribly lately.  For example, United States Steel Corporation (NYSE:X) is just 3.7% above its post-crisis low of $16.66 in 2009, after crashing from a high of $196 a year earlier.  Since the beginning of this year, shares have fallen more than 30% on uncertainty about global demand.  However, as I have said several times, uncertainty creates some of the market’s best opportunities, and I believe that to be the case here.  I’d like to take a look at a few of my favorite players in the steel industry and see where they might be going.

United States Steel Corporation (NYSE:X)

As mentioned before, United States Steel Corporation (NYSE:X)’s performance has been absolutely horrendous since rebounding to around $70 per share in 2010.  While it is true that steel demand has been shrinking all around the world, United States Steel Corporation (NYSE:X) has taken measures to improve their balance sheet, with the goal of riding out the tough times more comfortably.  The company’s liabilities have decreased by around 7% since last year and their pension and healthcare costs are gradually declining.

United States Steel Corporation (NYSE:X)

Shareholders who stick with United States Steel Corporation (NYSE:X) just might be handsomely rewarded.  Having posted negative earnings every year since 2008, United States Steel Corporation (NYSE:X) is expected to finally return to profitability this year with earnings of $0.94 per share.  While this doesn’t make the stock sound incredibly attractive at 18.4 times forward earnings and over $3 billion in net debt, consider that earnings are projected to rise to $2.22 and $3.26 in 2014 and 2015, respectively, meaning that if the company simply meets expectations, shares are trading for just 5.3 times 2015’s earnings!

I realize that meeting these numbers are a big “if,” however United States Steel Corporation (NYSE:X) could easily become a $50 stock again within the next couple of years if they seem to be on track.  We should get a better idea of the state of the company when they report earnings on April 30.

Cliffs Natural Resources Inc (NYSE:CLF)

Cliffs Natural Resources Inc (NYSE:CLF) has been severely beaten down this year, losing over half of its value in the last two months alone. Cliffs Natural Resources Inc (NYSE:CLF) was trading for over $100 as recently as 2011 and is now under $20.

The largest supplier of iron ore pellets to the steel industry, Cliffs Natural Resources Inc (NYSE:CLF) fell off of a cliff (no pun intended) after sales declined by 10.5% in 2012, and they are projected to decline an additional 6.8% this year.  After the recent decline, however, I think Cliffs Natural Resources Inc (NYSE:CLF) is priced right.  When the company reports its latest results on April 24, I think people will realize that the sky is not falling; that is the steel industry is not in quite as bad of shape as the market seems to believe.

At just 6.3 times the median forward earnings projections, analyst earnings estimates for this year are extremely varied, ranging from $0 to almost $4 per share.  Going forward, the range is even wider (read: uncertain), as 2014’s projections range from under $1 to about $7 per share.  I think that once the market gets some clarity as to how Cliffs Natural Resources Inc (NYSE:CLF) will actually perform, that will be enough to lift and stabilize the share price considerably.

Walter Energy, Inc. (NYSE:WLT)

Trading at just over its 52-week low, Walter Energy, Inc. (NYSE:WLT) traded as high as $143 less than two years ago amid rumors of an impending takeover valued at over $150 per share, which obviously didn’t actually happen.  Since then, shares have plummeted for this coal producer, whose main business is producing metallurgical coal for the steel industry.

Just this past week, the company sent out a letter to its investors to discuss the steps it is taking to increase performance, in order to fend off Audley Capital’s efforts to gain control of the board. Walter Energy, Inc. (NYSE:WLT) points out that it has increased its dividend by over 300% during the past decade, and highlights the defensive steps it took once coal prices collapsed in late 2011.

While I don’t think Audley’s proxy fight will be a success, Walter Energy, Inc. (NYSE:WLT) has a ways to go before it is out of the woods.  As the only one of the three companies here expected to post a loss for 2013, Walter Energy, Inc. (NYSE:WLT) is perhaps the most speculative.  They are expected to return to profitability in 2014 and beyond, and when they report their latest results on May 3, investors will get a better sense of direction in this company.  Additionally, the company filed an investor presentation with the SEC that it intends to use with its shareholders before the annual meeting, which is scheduled for the 25th of this month.

Final Note

On the topic of a potential buyout, I believe there will be a lot of consolidation within the steel industry over the next several years, and all of these companies represent potential targets, especially at the depressed prices they are currently trading at.  As all of these companies should (in theory) be worth more to the companies buying them out than they are as independent operations, I think we will see a lot of steel companies get bought out at significant premiums to their current prices, and the possibility of this is an added bonus for those investors who are willing to wait out the rough times.

Matthew Frankel owns shares of United States Steel. The Motley Fool has no position in any of the stocks mentioned.