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Trump's Steel Import Probe: U.S. Steel Over Reliance?

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Domestic steel maker United States Steel and its foreign rival Reliance Steel are scheduled to report first-quarter earnings next week. Both companies are expected to come up with stellar performances. Which of these will come out ahead? Such a comparison comes into sharp focus considering Trump’s latest policy imperative: steel imports.

Trump Probe Bolster Steel Stocks

After being stuck in a long rut, steel stocks rebounded yesterday. The industry’s rebound was backed by President Trump’s announcement of an investigation into whether cheap steel imports from China and other nations are hurting our national security. President Trump said yesterday that “steel is critical to both our economy and our military” and it is a “historic day for American steel.” Following this statement shares of United States Steel (X - Free Report) , AK Steel Holding Corporation (AKS - Free Report) and Steel Dynamics, Inc. (STLD - Free Report) increased 7.4%, 8.6% and 6.8%, respectively.

U.S. Steel had acknowledged earlier that it entered 2017 with improved market conditions than what it had faced at the onset of 2016. The company said that it expects net earnings of around $3.08 per share for 2017 should market conditions remain robust. This came as a breather for the company’s analysts after it incurred an adjusted loss of $1.60 per share last year.

Reliance Steel & Aluminum (RS - Free Report) , in its fourth quarter of 2016, projected demand to be up by 8% to 10% on a sequential basis in the first quarter of 2017. Moreover, the company had forecast average selling price to increase 2% to 4% from the fourth quarter of 2016.

Price Performance

Shares of both United States Steel and Reliance Steel notched up gains in the last year but U.S. Steel is a clear winner on this count with a return of more than 55.9% in the last twelve months. In contrast, Reliance Steel increased only 7%, falling behind the S&P 500 which rallied around 11.6% during the same period.

Valuation

Though United States Steel and Reliance Steel belong to different Zacks categorized industries, the average trailing 12-month EV/EBITDA ratio is one of the best valuation multiples for the steel sector. This is mainly because steel companies have a large amount of debt and EV (Enterprise Value).

Coming to EV/EBITDA, United States Steel is the one which lags behind with a ratio of 12.12 compared with 7.18 for the Zacks Steel-Producers Market industry. On the other hand, Reliance Steel has an EV/EBITDA ratio of 9.74, which is in line with the Zacks Metal Products-Distributor industry. 

Dividend Yield

In the last year, the dividend yield for Reliance Steel was higher than the broader industry. While the Metal Producer-Distributor industry offered a yield of 1.15%, Reliance Steel returned 2.34%. U.S. Steel falls marginally short on this count, providing a dividend yield of 0.66% compared to the industry average of 1.12%.

Earnings History and ESP

Riding on higher revenues, Reliance Steel posted profits of $61.7 million or 84 cents per share in the fourth quarter of 2016, beating the Zacks Consensus Estimate of 75 cents. Additionally, its revenues rose around 1.7% year over year to $2.06 billion in the reported quarter, beating the Zacks Consensus Estimate of $2.03 billion. (Read more: Reliance Steel Tops Q4 Earnings & Sales Estimates)

In contrast, U.S. Steel recorded net loss of $105 million or 61 cents per share in the fourth quarter of 2016. The results included unfavorable adjustments of $152 million. However, barring one-time items, earnings were 27 cents per share that outstripped the Zacks Consensus Estimate of a penny per share. Moreover, revenues of $2,650 million trailed the Zacks Consensus Estimate of $2,666 million, but increased 3% year over year. (Read more: U.S. Steel Q4 Earnings Crush Estimates, Sales Miss)

Considering a detailed earnings history, Reliance Steel delivered positive surprises in three of the prior four quarters, with an average earnings surprise of 7.1%. In comparison, United States Steel delivered an earnings beat in only two of the trailing four quarters, but posted an average positive earnings surprise of more than 630%. When considering Earnings ESP, Reliance Steel’s ESP is at 4.32%, while United States Steel’s ESP stands at 14.71%.

Conclusion

Our comparative analysis shows that Reliance Steel holds an edge over United States Steel only when considering dividend yield and valuation. However, U.S. Steel registered a better price performance, has a better Earnings ESP and delivered a significantly higher average positive earnings surprise. Also, on the rank front, U.S. Steel sports a Zacks Rank #1 (Strong Buy), while Reliance Steel carries a Zacks Rank #3 (Hold).

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