Should I Buy U.S. Steel? 3 Pros, 3 Cons

It's an efficient giant, but investors should be cautious

When it comes to American icons, United States Steel (NYSE:X) is certainly on the list. But the past year has been brutal for shareholders, with the stock price down 55%. Of course, a big factor is the slowing global economy.

Yet is U.S. Steel a good bargain at these levels? Or will it continue to be dead money?

To decide, let’s take a look at the pros and cons:

Pros

Huge Scale. U.S. Steel is one of the largest operators in the global market. It has about 24 million tons of steel capacity in North America and 5 million tons in the Slovak Republic.

The company also has an integrated platform, which means it controls its own supply — such as coke and iron ore — as well as the blast furnaces. As a result, U.S. Steel has been able to keep its costs relatively low.

What’s more, U.S. Steel is a top producer of tubular products. These are key for the fast-growing oil and gas industry.

Liquidity. U.S. Steel has a solid amount, coming to roughly $2.5 billion. The next major debt payment — for $863 million — doesn’t come due until 2014.

To protect its liquidity position, U.S. Steel has slashed its dividend from 30 cents a share to 5 cents a share.

Valuation. The shares are cheap. Consider that the stock is at a mere 0.15 times sales. In fact, the shares trade at the lowest levels since the bleakest point of the U.S. recession in the first quarter of 2009.

Cons

Supply. The world has excess amounts of steel, especially in the U.S. The result is that steel prices have plunged.

Because of this, last week Standard & Poor’s lowered its outlook on U.S. Steel from stable to negative. The firm sees little hope of a recovery for the next year or so.

Competition. Even though U.S. Steel is a large player, it still doesn’t have the scale of mega-operators like POSCO (NYSE:PKX) and ArcelorMittal (NYSE:MT). They could further squeeze rivals with price-cutting.

China. Of course, the country’s hefty economic growth has been huge steel demand. However, the momentum is starting to decelerate. So far, the Chinese government has been adept at managing the nation’s economy, but it’s not clear if Beijing can prevent a more severe downturn.

Verdict

Even with a dirt-cheap stock price, U.S. Steel has no foreseeable catalysts. If anything, the struggling economy could worsen. After all, the slowdown is hitting many countries across the globe. And a hard landing in China could be severe.

Besides, U.S. Steel’s dividend is meager, share buybacks are unlikely.

So in light of all these factors, the cons outweigh the pros on the stock.