United States Steel Corporation (NYSE:X) shares are down more than -22.57% this year and recently increased 1.43% or $0.36 to settle at $25.56. AK Steel Holding Corporation (NYSE:AKS), on the other hand, is down -46.23% year to date as of 10/12/2017. It currently trades at $5.49 and has returned -3.17% during the past week.
United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS) are the two most active stocks in the Steel & Iron industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect X to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, AKS is expected to grow at a 41.52% annual rate. All else equal, AKS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 9.44% for AK Steel Holding Corporation (AKS). X’s ROI is -4.00% while AKS has a ROI of 14.70%. The interpretation is that AKS’s business generates a higher return on investment than X’s.
If there’s one thing investors care more about than earnings, it’s cash flow. X’s free cash flow (“FCF”) per share for the trailing twelve months was +1.68. Comparatively, AKS’s free cash flow per share was +0.46. On a percent-of-sales basis, X’s free cash flow was 2.86% while AKS converted 2.46% of its revenues into cash flow. This means that, for a given level of sales, X is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. X has a current ratio of 1.70 compared to 2.00 for AKS. This means that AKS can more easily cover its most immediate liabilities over the next twelve months.
X trades at a forward P/E of 11.69, a P/B of 1.75, and a P/S of 0.40, compared to a forward P/E of 7.50, and a P/S of 0.30 for AKS. X is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. X is currently priced at a -8.12% to its one-year price target of 27.82. Comparatively, AKS is -28.52% relative to its price target of 7.68. This suggests that AKS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for X and 2.50 for AKS, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. X has a beta of 2.99 and AKS’s beta is 2.98. AKS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.X has a short ratio of 2.36 compared to a short interest of 4.24 for AKS. This implies that the market is currently less bearish on the outlook for X.
AK Steel Holding Corporation (NYSE:AKS) beats United States Steel Corporation (NYSE:X) on a total of 10 of the 14 factors compared between the two stocks. AKS has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, AKS is the cheaper of the two stocks on an earnings, book value and sales basis, AKS is more undervalued relative to its price target. Finally, TA has better sentiment signals based on short interest.