On Friday, JPMorgan resumed coverage on US Steel (NYSE:X) with a Neutral rating, significantly raising the price target to $52 from the previous $26. The adjustment reflects the firm's anticipation of the potential acquisition of US Steel by Nippon Steel Corporation. The analyst believes there is approximately an 80% probability that Nippon Steel's $55 per share offer will be successful, despite recent political discussions that could influence the deal's outcome.
The report indicates that if the acquisition does not materialize, US Steel's stock could face downside risks, with a potential drop to around $41. This estimate is based on a 5.5 times multiple, which is slightly above US Steel's historical average. The firm suggests that such a valuation would still offer support due to the possible re-rating of the steel industry as a whole.
JPMorgan also highlighted the expectation of a positive free cash flow (FCF) turn for US Steel in the coming year. This optimism is partly due to a reduction in capital expenditure requirements and the expected operational commencement of the Big River Steel 2 (BRS2) in the latter half of the year. However, the analyst described the BRS2 project as a "show-me-story," acknowledging risks associated with the ramp-up phase and the guided ~$100M incremental EBITDA contribution, which may be affected by initial start-up costs.
Lastly, the report mentions the stability in the tubing sector, as destocking activities are largely completed. Additionally, the launch of US Steel's new non-grain oriented electrical steel (NGOES) line is seen as a positive development. Nonetheless, it also notes that the market conditions in Europe continue to pose challenges for the industry.
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