The best time to buy companies that operate in cyclical industries is often when those industries are facing cyclical downturns. The problem is that you need to make sure you are buying the best of the best, especially if you are a long-term income-focused investor.
Steel is facing a downturn, and United States Steel (X 3.81%) is in the headlines. You'd be better off with competitors Nucor (NUE 2.52%) and Steel Dynamics (STLD 3.31%). Here's why.
The problems with United States Steel
U.S. Steel has an iconic name and holds a venerated place in the history of the steel industry. But that's all because of what has happened in the past. Today, U.S. Steel is little more than a shell of what it once was. That's a key reason why it has found itself in the headlines as Japanese steel giant Nippon Steel looks to buy U.S. Steel.
Image source: Getty Images.
Steel is a vital industry, given that steel is used in everything from construction to military equipment, and a huge amount is used in between. Perhaps it shouldn't be shocking to find that Nippon Steel's offer has become a political football. Given the difficulty, there are rumors that other North American steelmakers are waiting in the wings to buy U.S. Steel should the Nippon Steel deal fall apart.
This makes U.S. Steel something of a special-situation play, which can be a risky approach. Most investors should avoid it for this reason alone. But there's another wrinkle here. U.S. Steel makes heavy use of blast furnaces as it makes primary steel. That's an older and quite expensive-to-operate steelmaking technology. While it is needed, it requires high utilization rates to produce profits. The industry currently faces slowing demand and lower prices. U.S. Steel recently warned that it would lose at least $0.49 per share in the first quarter of 2025.
NYSE: X
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Uncertainty around the business and uncertainty around the business's earnings is a double whammy. This probably isn't the right time to buy U.S. Steel.
Nucor and Steel Dynamics shine through the cycle
Nucor and Steel Dynamics (which was founded by Nucor alumni) both use electric arc mini-mills. These are smaller facilities that are far more flexible than blast furnaces. Effectively, they can be ramped up and down more easily with changes in demand. This simple fact allows Nucor and Steel Dynamics to maintain more attractive margins throughout the steel business cycle.
NYSE: NUE
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To put a number on that, both Nucor and Steel Dynamics also warned that first-quarter earnings would be relatively weak. Nucor's earnings are expected to land between $0.45 and $0.55 per share. Steel Dynamics is projecting an earnings range of $1.36 to $1.40 per share. In both cases, these steelmakers are going to fall well short of first quarter 2024 earnings, but notice that they are expected to remain profitable.
NASDAQ: STLD
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U.S. Steel was solidly in the black in the first quarter of 2024, but in the face of an industry downturn, it is dipping into the red. So, not only is the company "in play," but its business model, heavily reliant on blast furnaces, is specifically a problem right now during an industry downturn. That's just not worth the risk when you have two competitors that have structurally stronger businesses.
Nucor and Steel Dynamics are opportunities today
Here's the interesting thing -- thanks to the weakness in the steel industry, Nucor and Steel Dynamics have fallen 40% and 20%, respectively, from their 52-week highs. Given that both have fallen into their own "personal bear markets," they are much more attractively priced than they were not too long ago. If you have been interested in U.S. Steel, for whatever reason, you should really take a closer look at Nucor and Steel Dynamics.
