On Monday, Morgan Stanley (NYSE:MS) adjusted its stance on US Steel (NYSE:X), moving the company's stock rating from Overweight to Equalweight. The firm also set a price target for US Steel at $39.00, slightly below the analyst high target of $43.00. The decision comes despite Morgan Stanley's recognition of the potential benefits from US Steel's ongoing transformational investments and growth initiatives. According to InvestingPro data, the stock has shown strong momentum with an 8.4% year-to-date return, though it remains volatile with a beta of 1.88.
Previously, Morgan Stanley had upgraded US Steel to Overweight, anticipating significant value creation from the company's strategic investments and review process. These moves by US Steel were expected to notably enhance its EBITDA, with projections of $1.4 billion in 2024, rising to an estimated $2.3 billion by 2026. Current EBITDA stands at $1.07 billion, while the company faces challenges with negative free cash flow, as highlighted by InvestingPro's analysis, which identifies cash burn as a key concern. Despite these challenges, US Steel has maintained dividend payments for 35 consecutive years.
The firm's analysts acknowledge the merits of US Steel's growth projects, which are aimed at boosting financial performance. They believe that these investments will indeed result in a meaningful uplift in the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow.
However, Morgan Stanley suggests that the potential upsides of US Steel's strategic efforts are now adequately reflected in the stock's current market price. The analysts indicate that the stock is trading very close to their standalone valuation of the company, implying that the transformative efforts of US Steel have been factored into its market performance.
With the stock's valuation approaching Morgan Stanley's target and the risk-reward balance appearing more even, the firm has opted to downgrade the rating to Equalweight. This change reflects a more cautious stance on the stock's near-term growth potential relative to its current price.
In other recent news, U.S. Steel's Q4 2024 earnings report showed a significant miss on both earnings per share (EPS) and revenue. The company reported an EPS of -$0.13, falling short of the forecasted $0.04, and a revenue of $3.51 billion, $90 million below the expected $3.6 billion. In addition, U.S. Steel is set to merge with Nippon Steel Corporation, a strategic move aimed at enhancing operational capabilities and market position. Despite facing challenges such as fluctuating steel prices and high raw material costs in Europe, the company remains focused on strategic projects and innovations. Looking ahead, analysts from U.S. Steel anticipate an adjusted EBITDA of $400-$450 million for Q1 2024. U.S. Steel executives have expressed optimism about the company's future, particularly in regards to the impending merger with Nippon Steel. The company has assured stakeholders of its commitment to maintaining its Pittsburgh headquarters and retaining its workforce.
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