BofA Cuts US Steel's Price Target To $3

United States Steel Corporation (NYSE: X) shares dropped another 5% on Monday to under $5.50, but one analyst said the stock still has nearly 50% downside remaining.

The US Steel Analyst

Bank of America analyst Timna Tanners reiterated her Underperform rating for U.S. Steel and cut her price target from $4 to $3.

The US Steel Thesis

Tanners said U.S. steel’s Friday announcement of additional furnace closures, a $125 million capex delay and an $800 million drawdown on its revolver are further signs the company is facing an unprecedented situation. Tanners estimates U.S. Steel now has just $724 million remaining in revolver capacity and $2.3 billion in total liquidity.

Tanners said U.S. Steel’s cost cutting measures will help, but steel prices remain in freefall given demand has been decimated by coronavirus (COVID-19) economic shutdowns.

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“We recently cut volumes 10% for U.S. steel mills in Q2E/Q3E to factor in a recession, which assumes a modest drop in auto demand, on top of sharply lower energy and distributor buying,” Tanners wrote in a note.

Bank of America’s cash burn forecast suggests U.S. Steel will need a full drawdown of its revolver in 2021. Tanners also cut her 2020 EPS estimate from a $3.30 loss to a $3.80 loss and her 2021 estimate from a $2.40 loss to a $3.30 loss.

For steel investors looking for a safe haven during the economic slowdown, Tanners said she prefers Buy-rated Commercial Metals Company (NYSE: CMC) or Neutral-rated Reliance Steel & Aluminum Co (NYSE: RS).

Benzinga’s Take

Companies with weak balance sheets are most at risk during the COVID-19 outbreak. Given U.S. Steel’s challenged balance sheet, the lack of clarity on steel demand and Tanners’ projected $1.7 billion in cash burn through 2022, U.S. Steel appears to be an extremely high risk investment at this point.

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