X Steels Itself For Safer Credit Ahead With Its Cash Profile, With Similar Muted Expectations from the Market

Moody’s is materially overstating United States Steel Corporation’s (NYSE:X) credit risk with its highly speculative, high-yield B3 rating. Our fundamental analysis highlights a much safer credit profile for X, whose stable cash flows would consistently exceed operating obligations each year. Additionally, their healthy liquidity profile following their recent equity offering would be sufficient to navigate the firm’s material debt headwall in 2021. We therefore rate X six notches higher at an XO (equivalent to Moody’s Baa3) credit rating.

Moreover, credit markets are grossly overstating X’s fundamental credit risk with a CDS of 684bps relative to an Intrinsic CDS of 151bps, and a cash bond YTW of 7.835% relative to an Intrinsic YTW of 2.655%.

Similar to credit markets, equity market expectations are muted. X is trading at a low 0.5x V/A’, below Asset’ values. At these valuations, barring a bankruptcy scenario, equity downside remains limited as Asset’ values begin to offer a floor to valuations. The market is expecting continued 2% Asset’ shrinkage, with ROA’ rebounding to 4% levels, but still below the cost of capital. X’s suppressed valuations are partially due to their current distressed credit pricing in the markets. If perceived credit risk were to fall to even negative scenario intrinsic values, there could be material equity upside, even without any improvements in profitability or in the underlying business fundamentals. There would also be material equity upside if management is able to execute operational improvements, or benefit from potential commodity tailwinds.

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