UBS, which downgraded U.S. Steel to “sell” from “buy” Monday and cut the company’s expected 2009 earnings to $5 a share from $8.15, is only one of three sell calls on the stock right now – despite a precipitous decline to about $31 from $196. That cut might look low, but it’s an anomaly among the 13 analysts that cover the company. The consensus estimate is actually $13.18 a share. Cramer doubts U.S. Steel is going to be able to meet even UBS’s lowball number, and that could result in a wave of more downgrades and estimate cuts.
U.S. Steel’s end markets are struggling; it sells to both the automotive and appliance industries. Plus, X sells to oil and gas drillers, and with prices plummeting and expenditure cuts planned in that industry, the company’s under a lot of pressure.
The big problem – yes, bigger even than those we’ve already mentioned – is that a stronger dollar and those ailing end markets are going to force the price of steel down. And that hurts especially bad for a company like U.S. Steel, whose costs are largely fixed. Competitors are enjoying cheap scrap prices, which have fallen $650 a ton to $250 just since July, but X is still mining its own iron ore. Cramer said the company would have to cut costs by 35% to 40% just to stay competitive with its scrap-using peers.
So as low as U.S. Steel has gone, Cramer thinks the stock could go even lower. X won’t be cheap again until it reaches $22 a share, he said. But even then, Nucor , with its variable scrap-based cost structure and a nice dividend, would be a better pick. Don’t expect a bottom until the one Bank of America analyst that put X in the sell block in August decides to recommend the stock.
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