U.S. Steel Demonstrates Strength

United States Steel Corp’’s (X) near-term profitability is expected to be strong due to higher flat-rolled contract prices and relatively low costs due to backward integration. The company also has strong cash flow, enabling increased dividend payments, stock buybacks and accelerated pension contributions. These factors lead us to rate the stock to a Buy with a six-month target price of $150.

Spot pricing is continuing to improve and is in the middle of a spike that started in early 2008. This is due to demand growth in China and other developing countries, high operating rates, rising input costs, a weak dollar and low inventories.

But U.S. Steel’’s domestic flat product volumes could suffer due to low steel demand from the automotive and residential construction sectors. There is the risk of volumes declining with the slowdown in the U.S. and global economy.

On July 29, United States Steel Corporation reported second quarter 2008 results. Net income was $5.65 per diluted share, more than doubled from $2.54 per diluted share in the second quarter 2007. Finally, net sales increased by 59% to $6.7 billion.

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