On Monday, JPMorgan (NYSE:JPM) made a significant adjustment to its stance on US Steel (NYSE: X) stock, upgrading it from Neutral to Overweight and lifting the price target to $42.00 from the previous $40.00. This change comes in the wake of news that President Biden may intervene to prevent NSC's acquisition of US Steel due to national security concerns.
The stock had already suffered a sharp decline of over 17%, falling to prices not observed since before the initial bid from Cleveland-Cliffs (NYSE:CLF) in August 2023, and has been fluctuating around $31.
The analyst at JPMorgan anticipates that shares could drop further into the mid-to-high $20s if the deal is officially terminated. This potential decline is seen as an opportunity to buy, with the belief that US Steel holds strong standalone valuation support. This outlook is based on a conservative estimate of an average hot-rolled coil (HRC) price of approximately $750 per ton for the years 2025 and 2026.
The new price target for December 2025 reflects a multiple of 6.0 times, which is a decrease from the ~6.7 times multiple implied by NSC's offer. The analyst suggests that less confidence in a foreign merger and acquisition premium for US Steel, as well as for the broader steel sector, partially counterbalances the additional valuation upside expected from the company's Big River Steel 2 (BRS2) and other assets being fully operational by 2026.
The recent developments and the revised outlook by JPMorgan indicate a shift in the perceived value of US Steel as it navigates the challenges and opportunities ahead without the proposed acquisition by NSC. The new price target set by JPMorgan reflects their updated assessment of the company's financial prospects in the coming years.
In other recent news, U.S. Steel, in partnership with the United Steelworkers union and Wheeling-Nippon, has filed trade petitions against imports of corrosion-resistant steel from multiple countries. The company also reported its Q2 earnings to be at the lower end of its outlook, with adjusted net earnings per diluted share estimated to be in the range of $0.76 to $0.80 and adjusted EBITDA expected to be approximately $425 million. In addition, the company has declared a dividend of $0.05 per share.
The proposed merger between U.S. Steel and Nippon Steel is currently under regulatory review, with Jefferies maintaining a Buy rating on the company and BMO Capital Markets and Morgan Stanley (NYSE:MS) upgrading their stock ratings. However, the company warned of potential job losses and closures of several steel mills if the merger does not proceed.
U.S. Steel has also updated its Code of Ethical Business Conduct, incorporating guidelines for generative artificial intelligence applications. These developments highlight the company's ongoing efforts to adapt and grow in the current business landscape.
InvestingPro Insights
With the recent volatility in US Steel's stock price, JPMorgan's upgrade to Overweight and the new price target of $42.00 highlight potential opportunities for investors. In line with these developments, InvestingPro data shows US Steel with a market capitalization of $7.03 billion and a P/E ratio of 13.73, suggesting a valuation that may attract investors looking for reasonably priced stocks in the current market. Despite a challenging environment reflected in a revenue decline of 11.39% over the last twelve months as of Q2 2024, the company has maintained dividend payments for 34 consecutive years, showcasing a commitment to shareholder returns.
InvestingPro Tips indicate that analysts are cautious, with four analysts having revised their earnings downwards for the upcoming period, which aligns with JPMorgan's conservative estimates. Additionally, the stock has experienced significant price declines over the last six months, with a total return of -33.92% in that period. However, analysts predict the company will be profitable this year, which may provide a foundation for recovery. For investors seeking further insights, there are additional InvestingPro Tips available on their platform.
Overall, the InvestingPro data and tips provide a nuanced perspective on US Steel's financial health and market performance, complementing JPMorgan's analysis and offering investors additional angles to consider when evaluating the company's future prospects.
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