Buy U.S. Steel Stock. It Won’t Be Stuck in Deal Limbo Forever.
Its merger with Japan’s Nippon is in doubt, but shares still look
The takeover of United States Steel by Japan’s Nippon Steel is in limbo following opposition from both Republicans and Democrats. Its stock is still a buy.
U.S. Steel’s history stretches back to the 19th century and includes names such as Andrew Carnegie and J.P. Morgan. Its blast furnaces—300-foot-high tubes with iron ore, coal, and limestone packed at the top and molten hot pig iron flowing out the bottom—once symbolized America’s industrial might.
No longer. U.S. Steel is now just the world’s 27th-largest steel company based on steel output, after falling from 12th largest a decade ago. It’s the third-largest steel maker in the U.S., trailing Nucor and Cleveland-Cliffs. U.S. Steel accounted for more than 10% of global steel production in 1950. In 2023, it accounted for less than 1%.
Many factors contributed to the decline. The company diversified into chemicals and oil in the 1980s, while Nucor’s pioneering use of steel scrap melted with electricity eroded U.S. Steel’s domestic market share. Steel also tends to get produced where it is needed. China’s rapid industrialization over the past 20 years has made it today’s global steel-making behemoth.
It isn’t easy to be a small, relatively high-cost player in a mature, commodity-oriented industry. Fewer shipments and lower profits become a downward spiral as diminishing cash flow leaves less money for capital spending. That’s another reason U.S. Steel keeps shrinking.
So it shouldn’t come as a surprise that U.S. Steel decided to explore its strategic options in August after rejecting a $35-a-share bid from Cleveland-Cliffs. The bidding, which likely included Nucor and steel service center Esmark, was eventually won by Nippon Steel, which offered to pay $55 a share in cash. U.S. Steel stock traded north of $50 in mid-December, up from $23 before the bidding started.
The deal makes sense. Nippon, the world’s fourth-largest steel maker, would bring an injection of capital and technology from a large global player, arresting U.S. Steel’s slow decline and positioning itself as Nippon’s production hub in North America. U.S. politicians, however, didn’t see it that way. Democrats and Republicans alike decried the deal, insisting that U.S. Steel must remain in U.S. hands. Comments from President Joe Biden panning the takeover on March 14 sent U.S. Steel shares down 18% over two days to $38.26.
The political fear is mainly about jobs. U.S. Steel employs some 22,000 workers globally, with 14,000 people in North America. About 11,000 of its U.S. workers are represented by unions. Today, U.S. Steel has more pension beneficiaries than employees—about 60,000. Overall, American steel mills employ fewer than 100,000 workers, according to the Bureau of Labor Statistics. There are about 165 million jobs in the U.S.
The U.S. steel industry is tiny. The market capitalization of the four largest U.S. steel producers is about $90 billion. Nucor, the largest American steel company, accounts for about half that amount. Production for the four amounted to about 68 million metric tons in 2023, more than 75% of the U.S. total but only about 3% of global output. The U.S. doesn’t make much steel anymore. Letting U.S. Steel struggle as a stand-alone company won’t change any of that.
On Wednesday, Biden called on the U.S. Trade Representative to raise tariffs on imported Chinese steel from about 8% to 25%. China is the world’s dominant producer, making about one billion of the 1.9 billion metric tons produced in 2023; it exports about 600,000 tons to the U.S. Imports accounted for some 20% of total U.S. demand last year, and a reduction in the supply or an increase in the cost of imported steel could cause prices in the U.S. to rise. Tariffs aren’t a primary reason to own U.S. steel stocks, but they don’t hurt.
U.S. Steel is probably worth more than the market is giving it credit for. At a recent $40.30 a share, its stock trades for about 12.4 times estimated 2025 earnings per share of $3.25, a small discount to the 13.5 times average multiple for Cleveland-Cliffs, Nucor, and Steel Dynamics. That’s up from 11.8 times forward-year earnings in August, before details of the Cliffs bid emerged. If U.S. Steel were to trade at 11.8 times after a Nippon deal break, its stock would fall to about $38, down 5%.
But a lot has changed since then. Steel prices are moving higher. That doesn’t hurt, and is one reason the sector is trading at a better multiple. Hot rolled coil, a benchmark steel product, currently costs about $850 a ton, up roughly $50 from last summer. Higher steel prices have shown up in Wall Street estimates. Analysts expect U.S. Steel to generate $1.8 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda, in 2024, up from $1.6 billion in August. What’s more, if U.S. Steel traded at the pre-Nippon discount to its three steel peers, shares wouldn’t budge.
And while a Nippon deal probably won’t happen, U.S. Steel could still be in play. Cleveland-Cliffs would likely still be interested in creating a larger, more-sustainable North American steel giant. It was willing to pay $54 in cash and stock for U.S. Steel—its final bid before Nippon offered more.
“We don’t see any scenario where U.S. Steel would take an alternative offer below our new $46 price target,” wrote Wolfe Research analyst Timna Tanners in a recent report.
And perhaps a whole lot more.