Shares of United States Steel are soaring after catching an upgrade on Wall Street. Despite the ratings bump, Wall Street doesn’t love the stock. Investors are happy for now, though. U.S. Steel (ticker: X) stock is up 6.5% on a down day for markets. The S&P 500 and Dow Jones Industrial Average are down 1.4% and 1.3%, respectively. Morgan Stanley analyst Carlos de Alba gets most of the credit for Monday’s rise. On Sunday evening he upgraded shares to Hold from Sell. His price target went to $31 a share up from $21. An upgrade to Hold isn’t a ringing endorsement, but de Alba acknowledged that the Russia-Ukraine conflict was driving steel metallic prices higher. Metallics typically refer to steel scrap, iron ore, and pig iron, all materials that get bought by steel companies and turned into steel. U.S. Steel owns its own iron ore mines and is better positioned to deal with rising commodity prices.
Benchmark steel prices are down about 17% year to date, but have risen about 21% over the past few days, as Russia’s invasion of Ukraine has continued. Falling steel prices had been a problem for U.S. Steel stock in one way. The stock is on a tear, up about 40% year to date. But the stock trades for 3.3 times estimated 2022 earnings. The S&P 500 trades for closer to 19 times estimated 2022 earnings.
Investors are typically fearful of holding commodity stocks when commodity prices are falling. Falling commodity prices mean lower earnings down the road, and predicting where commodity prices will bottom out can be difficult. In the case of steel, hot rolled coil prices, a key benchmark product, are at about $1,200 a ton. They averaged about $600 a ton back in 2019, before the invasion and the Covid-19 pandemic. De Alba, for his part, sees prices sliding to $866 a ton by the fourth quarter of 2022 and $768 a ton in 2023.
The upgrade to Hold doesn’t change the Buy-rating ratio for U.S. Steel stock. About 39% of analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the S&P is about 58%. About 23% of the analysts covering U.S. Steel stock rate shares Sell. The average Sell-rating ratio for stocks in the S&P 500 is less than 10%. The average analyst price target is about $33 a share, up roughly $1 after de Alba’s increase.
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