Can U.S. Steel Stock Return To Pre-Inflation Shock Highs?

United States Steel stock (NYSE:X) currently trades at $24 per share, about 37% below its pre-inflation shock high of $38.50, seen in March 2022, and has the potential for some gains. U.S. Steel saw its stock trading at $18 in late June 2022, just before the Fed started increasing interest rates, and is now 35% above those levels, compared to the S&P 500 which rose almost 17% over this period. The recent gains in the stock are driven by better-than-expected Q1 2023 results as well as a potential recovery in the company’s European operations.

Returning to the pre-inflation shock level means that U.S. Steel stock will have to gain over 59% from here. However, we do not believe that will materialize anytime soon and estimate  United States Steel valuation to be around $27 per share, implying about 10% gains. While we expect the company to benefit from multiple trends such as rising U.S. infrastructure spending as well as greater government incentives for U.S. manufacturing, there are near-term macro headwinds due to high-interest rates which could weigh on steel demand and investments. Our detailed analysis of United States Steel upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how X stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

X and S&P 500 Performance During 2007-08 Crisis

X stock declined from $119 in September 2007 (pre-crisis peak) to around $20 in March 2009 (as the markets bottomed out), implying the stock lost roughly 82% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $55 in early 2010, rising nearly 180% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

X Fundamentals Over Recent Years

U.S. Steel revenues have declined from around $13 billion in 2019 to about $9.8 billion in 2021, as the company saw its volumes impacted by the Covid-19 pandemic. However, business picked up strongly as Covid-19 lockdowns were eased, with revenue rising to about $20 billion in 2021 and to almost $21 billion in 2022 due to a surge in steel prices. Earnings per share improved from a net loss of about $6 per share in 2020 to a profit of close to $10 per share in 2022.

Does X Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

X’s total debt has declined from around $4.9 billion in 2020 to about $4 billion currently. The company garnered $3.5 billion in cash flows from operations in 2022, with its total cash position standing at about $2.8 billion as of the most recent quarter. This could imply that the company’s financial position is relatively stable.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe X stock has the potential for some gains once fears of a potential recession are allayed.

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