A Bleak Outlook for U.S. Steel

U.S. Steel reports earnings on Tuesday, and Cramer’s expecting the worst.

The stock’s trading at two times earnings, and it’s still expensive. Why? Because the company will never make the earnings on which the multiple’s based. The steel market’s too tough, and the company’s underperforming. When that happens, analysts will cut estimates, sending X tumbling down.

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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