United States Steel stock surged nearly 9% during Wednesday’s trading, recovering somewhat from more than a 30% correction in its price from the beginning of the year, after a revival in discussions around the company’s acquisition by Nippon Steel Corporation. Incidentally, the stock is currently trading 10% higher compared to a year back, indicating it has been a volatile period for the United States Steel stock, since back in December 2023 when Nippon Steel entered into a definitive arrangement to acquire the company at a valuation of $55 per share. The offered price was at a premium of 40% over the prevailing market price at that point in time. The announcement was followed by a few trading sessions when the stock gained almost 30% to reach a temporary peak of ~$50, albeit at a lower level as compared to the offered price.
The enthusiasm around the stock was, however, short lived as the deal soon faced opposition from multiple fronts including President Joe Biden, Vice President Kamala Harris, and Former President Donald Trump. Consequently, with increasing uncertainty around the deal, the stock corrected to its pre-announcement levels of ~$30 at the beginning of this month.
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Trefis analysis of the stock considers the two distinctive scenarios of the the deal going through or not. Even in the scenario the deal is rejected, Trefis estimates that the stock is currently trading at a discount of more than 10% of its fair value at $41 – Trefis’s estimate for United States Steel’s valuation. On the other hand, if the deal succeeds the company would benefit from the synergy of the resulting business, and the offer price seems like a reasonable estimate of the post acquisition valuation.
While returns for the stock were 42% in 2021, 6% in 2022, and 96% in 2023, indicating that its performance has been superior as compared to the S&P 500 with returns of 27% in 2021, -19% in 2022, and 24% in 2023, consistently beating the S&P 500 – in good times and bad – has been difficult for a majority of individual stocks. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Moving forward, notwithstanding the deal, United States Steel’s financial performance would be impacted by softening metal prices, which the company has tried to counter balance with cost control initiatives. Any improvement in steel prices or an improved product mix with value added products would be a key determinant of the trajectory of the stock, going forward.
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