Share of steelmaker United States Steel (NYSE:X) rose a dramatic 18% on Wednesday. By 1 p.m. EST, the stock was still clinging to a gain of 17%. The advance was largely tied to political events.
On Tuesday, Georgia held runoff elections for two Senate seats. The outcome will ultimately determine which party controls the Senate. It appears today that the two Democratic candidates will likely win, which should make it easier for the incoming administration to get its legislative priorities passed into law. Infrastructure spending is expected to be one of those priorities.
As one of a handful of large domestic steel producers, U.S. Steel would likely benefit. But there’s more to the story than that, since the shares of peers like Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) were only up 6% and 7%, respectively, at roughly 1 p.m. today. The key difference is that those two steelmakers have materially stronger financial positions.
To put numbers on that, Nucor’s debt-to-equity ratio is around 0.5 times, while Steel Dynamics’ number is roughly 0.6 times. U.S. Steel shows up with a far more troubling 1.4 debt-to-equity ratio. So higher infrastructure spending will be good for all the steel mills, but will make it notably easier for U.S. Steel to shoulder its current debt load. Investors reacted to what could be a much improved outlook.
It’s nice to see big market gains, but at the end of the day there’s no way to tell whether a big infrastructure bill will get passed. And a lot of good news has been priced into U.S. Steel’s stock in a very short period of time (just a few hours, actually).
Investors looking at the steel sector will probably want to tread with caution when it comes to heavily leveraged U.S. Steel. If the market’s expectations on spending don’t come to pass, or take longer than hoped, Wall Street’s mood could easily shift here. For most long-term investors looking at the steel sector, a financially stronger mill is probably a better option.
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