Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – February 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how United States Steel Corporation (X)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â United States Steel Corporation is an integrated steel producer. The company manufactures a range of value-added steel sheet and tubular products for the automotive, appliance, container, industrial machinery, construction and oil and gas industries. The Companyâ€™s integrated steel facilities include Gary Works, which is made up of Gary Works in Gary, Ind., East Chicago Tin in East Chicago, Ind., and Midwest Plant in Portage, Ind.; Great Lakes Works in Ecorse and River Rouge, Mich.; Mon Valley Works, which includes Edgar Thomson Plant and Irvin Plant near Pittsburgh, Pa., and Fairless Plant near Philadelphia, Pa.; Granite City Works in Granite City, Ill.; Fairfield Works in Fairfield, Ala.; U. S. Steel Canada’s Lake Erie Works in Nanticoke, Ontario, and U. S. Steel KoÅ¡ice in the Slovak Republic. The Company has three reportable operating segments: Flat-rolled Products, U. S. Steel Europe and Tubular Products. Other businesses include railroad services and real estate operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- Earnings Stability – positive earnings per share for at least 5 years -Â FAIL
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
Balance Sheet – DecemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
United States SteelÂ CorporationÂ is not suitableÂ for the Enterprising Investor orÂ for the Defensive Investor. Â The Defensive Investor is concerned by the insufficient earnings growth or stability over the last ten years, the low current ratio, and the poorÂ PEmg.Â The Enterprising InvestorÂ is concerned by the lack of earnings growth or stability over the last five years. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities at this time. Â From a valuation side of things,Â the company appears to be overvalued due to the negative normalized earnings (EPSmg). Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out previous ModernGraham valuations of United States Steel Corporation (X)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on United States Steel Corporation (X)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in United States Steel Corporation (X)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.