U.S. Steel is undergoing a transformation to become a tech-savvy steelmaker, making it an attractive play, according to Morgan Stanley. Analyst Carlos De Alba upgraded the steelmaker to overweight from equal weight and named it a top pick on “the expected value creation from the company’s transformational investments.” He increased his price target by $15 to $40, implying the stock could gain roughly 23.2% over the next 12 months. “While we expect the capex necessary to complete this transformation will result in negative FCF [free cash flow] in 2023e … X’s strong balance sheet positions the company well to complete this transformation,” De Alba wrote in a Monday note. “Furthermore, continuing interest from multiple parties in acquiring X, despite the near-term hit to FCF, highlights the value of the company’s ongoing transformation strategy.” U.S. Steel, historically an integrated blast furnace steelmaker, is rapidly transforming by expanding its electric arc furnace, or EAF, capabilities and high value-add downstream offerings, De Alba said. The analyst noted that U.S. Steel’s Big River mini mill, which is expected to come online in 2024, will almost double its EAF steelmaking capabilities. He added that the company is also increasing its presence in downstream products by constructing a galvanizing line and non-grain-oriented electrical steel line in conjunction with the mini mill, contributing to “robust EBITDA growth” of $600 million over three years. Shares of U.S. Steel have added about 29.7% this year. The stock gained about 1% in premarket trading Monday. The upgrade comes as U.S. Steel also faces rising interest rates and declining steel prices, which the firm expects will continue to decline in the first quarter of 2024. In mid-September, U.S. Steel was reportedly locked in conflict with rival Cleveland-Cliffs over a possible sale transaction. U.S. Steel rejected a $7.3 billion buyout proposal in August from Cleveland Cliffs and said it was reviewing “strategic alternatives” after receiving several unsolicited offers. — CNBC’s Michael Bloom contributed to the report.
