U.S. Steel Stock: Betting on EPS Cut and Merger Uncertainty?

Key Points

• U.S. Steel agreed to be acquired by Nippon Steel Co. for $55 per share in cash in December 2023, but the U.S. Department of Justice is reviewing documents.
• Nippon Steel Co. voluntarily postponed the deal closing by three months to December 2024.
• Hot-rolled steel prices have stumbled 37% in 2024, causing peer steel stocks to collapse. If the deal happens, the Nippon Steel buyout price will be incredibly attractive.

American integrated steel producer United States Steel Co. NYSE: X lowered its adjusted Q2 EBITDA guidance on June 17, 2024. However, the stock reaction was minimal, as shares continued to chop around in a tight range. Investors are waiting for the Japanese steel producer Nippon Steel's acquisition of U.S. Steel to close, but the deal has been postponed at the request of the United States Department of Justice (DOJ).

The DOJ is reviewing documentation related to the deal to determine whether to let it go through or block it. Judging by the activity in its underlying stock price, the market appears convinced the deal will be blocked. However, the upside to $55 from its current levels of around $36 presents dramatic upside potential if the deal closes in December 2024. This could be a calculated opportunity for long-term investors.

U.S. Steel operates in the basic materials sector and competes with steel producers, including Nucor Co. NYSE: NUE, Steel Dynamics Inc. NASDAQ: STLD, and Cleveland-Cliffs Inc. NYSE: CLF.

Nippon Steel Offers $14.1 Billion to Acquire U.S. Steel in December 2023

On December 18, 2024, U.S. Steel agreed to be acquired by Nippon Steel Corporation (NSC) for $55.00 per share, a 40% premium, in an all-cash deal valued at $14.1 billion. NSC would honor all collective bargaining agreements in place with the United Steelworkers Union, and U.S. Steel would retain the name and headquarters in Pittsburgh, Pennsylvania. This decision was made after U.S. Steel field buyout offers from several parties, including Cleveland-Cliffs.

Cleveland-Cliffs Has Been Stalking U.S. Steel To Merger and Urges

Competing steel producer Cleveland-Cliffs had made several public offers to merge with U.S. Steel and opposed NSC's acquisition. Cleveland-Cliffs made an initial offer for $31.50, then a 50/50 cash and stock deal, and raised the offer to $35.00 per share at the end of July 2023. Cleveland-Cliffs went public about its attempt to acquire U.S. Steel and provided “compelling” reasons for U.S. Steel to accept the deal.

Nippon Steel Delays the U.S. Steel Acquisition Until the End of 2024

At the request of the U.S. DOJ, Nippon Steel voluntarily postponed the closing of the U.S. Steel deal by three months. While U.S. Steel shareholders have approved the deal, it's facing bipartisan pressure, opposed by the Biden administration and former President Donald Trump. The deal was scheduled to close in September 2024 but was pushed to December 2024.

Rolled Steel Prices Have Tumbled 37% in 2024

Meanwhile, rolled steel prices have tumbled by 37% since the deal was announced in December 2023. This has caused all steel producer stocks to sell off sharply, and the underlying stocks of its competitors reflect the dramatic sell-off. Cleveland-Cliffs stock is trading down 27.5% year-to-date (YTD). Nucor shares are down 9.5% YTD. Olympic Steel Inc. NASDAQ: ZEUS stock is down 31% YTD.  

X Stock is in a Descending Triangle Pattern

The daily candlestick chart for X shows a descending triangle pattern. The descending trendline commenced at the $48.07 peak on March 6, 2024, as it capped bounces to the flat-bottom lower trendline support at $36.16. X is nearing the apex point as a decision needs to be made to either break out through the upper descending trendline or break down through the flat-bottom lower trendline. The daily relative strength index (RSI) is turning back down at the 41-band. Pullback support levels are at $35.60, $32.47, $29.84, and $28.05.

Nucor’s Lowered Guidance Softened the Blow of U.S. Steel’s Guidance

On June 14, 2024, steel producer Nucor cut its guidance for Q2 2024 earnings. The company cited weaker earnings due to mostly lower average selling prices and softer volumes. The EPS guidance was cut by over 50% to $2.20 and $2.30 versus $5.81 in the year-ago period and $3.00 consensus estimates. Ironically, NUE bounced from a gap down to $149.12 to close up to close at $154.79. The market was apparently expecting an even worse guidance cut. This likely softened the blow for U.S. Steel’s Q2 2024 adjusted EBITDA guidance cut.

U.S. Steel Guidance Had No Reaction  

On July 17, 2024, U.S. Steel issued in-line guidance for Q2 2024 of EPS 76 cents to 80 cents versus 77 cents consensus analyst estimates. However, they lowered Q2 adjusted EBITDA to $425 million, down from its previous guidance of $425 to $475 million. U.S. Steel stated that the lowered guidance represents stable demand for flat-rolled steel products used domestically despite volatile steel prices. A European steel producer restarted its temporary idled blast furnace to accommodate improving customer demand. Challenging market conditions are negatively affecting the tubular segment's performance.

U.S. Steel analyst ratings and price targets are at MarketBeat.