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Strategies & Market Trends : The Bird's Nest

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From: clutterer	3/19/2009 1:28:08 PM
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"Merrill Lynch/BAM is out with some pretty harsh comments on Steels lowering their hot rolled coil price benchmarks given the continued fall in steel prices. Revised ’09 benchmark is now $475/ton, down from previous forecast of $600/ton. They are also revising their ’10 and ’11 forecasts to $550/ton (was $650/ton) and $600/ton (was $700/ton). Firm is now assuming a 55% utilization rate for the group in 2009, down from 65%. One of the most hardest hit names in the sector is US Steel (NYSE:X): Cut EPS outlook, uses of cash to exceed $1bb in 2009 Given the decline in benchmark pricing/operating rates they are lowering ’09E EPS to a $6.00 loss (was $2.00 loss) and revising down ’10E and ’11E EPS as well. US Steel has an undrawn $750mm revolver but liquidity is a near term concern as bank covenants could be tripped. In firm's view, US Steel is a prime candidate to issue equity and cut the dividend near term as it looks to bolster its liquidity position. Assuming reduced revolver access, they estimate the company is facing a $700mm funding gap this year. Decreasing PO to $11 With EPS and EBITDA at negative levels this year, they value X based on 60% of tangible book value (in line with previous trough levels). This brings PO to $11 (was $24). Based on revised PO, they calculate 35%+ downside to X shares. Highest conviction underperform call Merrill maintains underperform view on US Steel given the company’s high fixed cost structure, automotive exposure, and liquidity issues. Profits in all segments are under pressure and they see further downside to Street consensus. In firm's view, 2009 losses should be comparable to those seen in the 2001-03 timeframe."

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