Must-know: An overview of US Steel Corporation (Part 3 of 8)
U.S. Steel’s performance versus its peers
We have seen that U.S. Steel Corp. (X) supplies its steel to all major steel consumers. It competes with companies like ArcelorMittal (MT), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS) to get a portion of the competitive market.
Where U.S. Steel is placed versus its peers
In this section we’ll compare U.S. Steel with its U.S. based peers. There are various metrics, each with its own merits, to compare companies. We’ll analyze the earnings before interest, taxes, depreciation, amortization (or EBITDA) margins and return on assets (or ROA). The reasoning is based on the basic structure of the steel industry, which is asset heavy and cyclical in nature.
- EBITDA margins – If you look at the previous chart, U.S. Steel has the lowest margin compared to other companies. Lower margins are a reflection of the efficiency of a company. Currently, one reason for lower margin is higher operating leverage. Previously, we saw how U.S. Steel Corp. has high fixed costs due to the manufacturing process it uses. Right now, the capacity utilization across the plants is low, which negatively impacts the margins. The company also has higher financial leverage, which means a higher component of interest costs. We’ll discuss this more in the next sections.
- ROA – U.S. Steel has negative ROA which is a reflection of the negative earnings the company has been generating. Even if you compare this ratio to ArcelorMittal, which has negative earnings, the ratio for U.S. Steel is much higher. This can be seen in the previous graph. U.S. Steel has had negative earnings for past several years. It becomes difficult for a company to sustain its operations for an extended period of time with negative earnings.
Along with the steel companies we discussed, there are also exchange-traded funds (or ETFs) like the SPDR S&P Metals and Mining ETF (XME) which invest in U.S. based steel makers.
Browse this series on Market Realist:
- Part 1 - Must-know: The history of US Steel Corporation
- Part 2 - Must-know: US Steel Corporation’s key operations
- Part 4 - Must-know: Why dumping has hit US Steel hard
- Basic Materials Industry
- US Steel Corporation
- Nucor Corporation