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Materials Stock

US Steel: What's The Word With Stimulus Spending?

investing strategies materials Oct 02, 2020

 Ticker: X

Rating: Overweight

Price Target: $28

Target Date: 9 months

 


 

We have been getting a lot of questions recently about low dollar priced stocks, and questions about government stimulus plays. US Steel checks the box on both.

Since we believe that the most recent COVID stimulus bill is priced into many stocks, it’s it’s important to think about the next potential major government spending event.

There is a lot of buzz that the recent COVID stimulus package is just the first leg of multiple stimulus events, we see increasing odds of another government bazooka flooding the US ecosystem with cash. But we think the next one will be aimed specifically at the infrastructure and materials sectors, aimed at rebuilding the country’s roads and bridges. This is something that is increasingly likely given the Biden Administration’s goals to decrease unemployment (this would put people back to work, similar to the way the “New Deal” did, as infrastructure projects are typically very labor intensive and require millions of labor hours for successful projects.

Analysts estimate that an infrastructure bill could add almost $100 billion to annual surface transportation systems. The bill would target fixing existing infrastructure and constructing new roads and bridges, with more immediate impact on local economies. An infrastructure package could catapult building materials (steel, cement etc) into a Super Cycle. Steel, specifically, would be a major beneficiary of a bill of this nature.  The cost to repair bridges made of steel in poor conditions is estimated by the Federal Highway Administration at over ~US$300 billion.

Beyond just the potential of a potential massively impactful government spending program for US Steel, even without government stimulus, demand for domestic steel is quite strong, and US Steel is the primary producer of Steel in the USA. Our analysts believe that steel prices should remain well supported, as demand is healthy and supply remains tight.

Broader US forecasted US economic growth can also be a major contributor. Average Wall Street Analyst forecasts for GDP growth are ~7 percent this year. Demand for steel is typically directly correlated between 2-3X with GDP growth, meaning demand for steel could settle somewhere around 15% this year.

Lastly, China recently announced its plans to significantly reduce emissions in the steel industry, which could lead the country to become a net importer of steel for the first time in 15 years. If this scenario plays out it would be a tremendous tailwind for US Steel, as the large majority of its revenue currently comes from sales in the US. However, decreased production of steel in China would expand US Steel’s relatively small current Chinese footprint and could be a tremendous market opportunity for the stock.

We believe US Steel offers investors a unique opportunity to gain exposure to a steel trade that may be entering a super cycle. There are 4 factors at play: potential stimulus, organically strong demand for US steel, economic growth, and aggregate demand uplift in China. Given these four factors, and the fact that US Steel (X) is a blue chip name in the space which is a pure play on demand for domestic steel, we assign US Steel an overweight target and a $28 price target.

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