Cash stash bolsters U.S. Steel
Cost cuts are not the only savings U.S. Steel Corp. CEO Mario Longhi is using to battle the company's slump.
Longhi has stashed nearly $1.5 billion in cash in the company's corporate bank, the highest level in nine years, and has made it a key component of his strategy for making the company more competitive.
“Very early, we really focused hard that one of the big levers we needed to create was liquidity and cash on hand,” Longhi told analysts late last month when the company released quarterly earnings. “This is a very volatile world and opportunities come by when you don't expect.”
The buildup in cash, coming as the Pittsburgh-based steelmaker dramatically reduces expenses and debt, is one ray of optimism for the company whose fortunes have sagged because of foreign competition and lower prices for steel.
Companies can see their cash suffer in difficult times. And growing that money is important because it gives them flexibility to invest in capital improvements, acquisitions or use it in other ways to boost their performance when the business and economic climate is right.
Longhi, who was promoted to CEO on Sept. 1, said building a strong cash position has been a priority as the nation's second-largest steel producer works to cut costs, improve its competitive position and restore profits. It hasn't turned an annual profit in five years.
In 2014, U.S. Steel has shaved a combined $1.4 billion in debt and expenses. The company's Carnegie Way cost-cutting initiative, begun in April 2013 under Longhi's leadership, has cut costs by $435 million so far. Net debt, which is the company's total debt minus cash, was reduced to $2.2 billion as of June 30, following a $322 million payment in May.
U.S. Steel's cash-on-hand is up from $604 million at the end of 2013. About $300 million of the increase came from a federal tax refund, $400 million from paying its bills more slowly and the rest from Carnegie Way benefits, Chief Financial Officer David B. Burritt said. It has acknowledged layoffs as part of the cost cuts but won't say how many.
The company's improved cash position and better-than-expected results in the second quarter sent its stock soaring in recent weeks, with analysts' forecasting it could rise as high as $48 a share. The company reported an $18 million loss in the April-June period, beating its own estimates and analysts' forecasts, compared with a wider loss of $78 million a year ago.
“The company's balance sheet has dramatically improved,” said KeyBanc Capital Markets analyst Philip Gibbs, who raised his rating to buy and his price target to $48 a share.
Goldman Sachs analyst Sal Tharani, who raised his price target to $47, said in a report that U.S. Steel is his company's “top pick in the steel sector.”
The company's shares have gained 27.6 percent this year. They closed on Tuesday at $37.65, down 23 cents.
Andrew R. Lane, analyst with Morningstar Inc., said it isn't surprising that the company improved its cash balance “because they've been burning a lot of cash in recent years” but he remains cautious about U.S. Steel's outlook. His price target on the stock was $28.
“It's clear that U.S. Steel's prospects have improved, but we believe investors have been too quick to revalue the company,“ he said. “They'll need to invest in new equipment and a significantly higher cash balance to become a more competitive player.”
Executives say they will use the stockpiled cash on high-return projects and profitable growth opportunities.
They have been looking closely at building more-efficient electric arc furnaces and a technology called DRI, for direct reduced iron, which could produce a cheaper substitute for iron ore, the raw material for steel. In January, Longhi disclosed a plan to replace an aging blast furnace in Fairfield, Ala., with an electric furnace by 2017. Analysts say the company will need more.
A stronger cash position was needed because “we were beginning to conceive of the fact that electric furnaces were going to have a role to play,” Longhi said. “I think that is going to be very valuable for us.”
The company also will need to make continued investments to counter headwinds from the increasing use of aluminum in the auto industry. Longhi has said U.S. Steel is developing stronger, lighter-weight steels to counter that threat.
Charles Bradford, an analyst with Bradford Research Inc., thinks a big decline in raw material costs may deter U.S. Steel from building electric furnaces and investing in DRI. “Costs for both iron ore and coal to make coke have come down a lot,” Bradford said.
Iron ore peaked at $200 a ton in early 2011, and has declined to about $93 a ton, he said. And metallurgical coal has declined from a peak of $330 to below $100 a ton. It could be more economical to stay with current blast furnace technology to make metal, instead of building electric furnaces at $100 million to $200 million apiece, Bradford said.
Despite Longhi's positive comments about electric arc furnaces and DRI, “I think both of those aren't going to happen,” Bradford said.
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or email@example.com.