The Potential End of an Iconic American Company

3 Mins read

United States Steel, also known as U.S. Steel, may soon become a thing of the past as an independent publicly traded company. After receiving multiple bids, including one from steel peer Cleveland-Cliffs, U.S. Steel announced that it is considering strategic alternatives.

This news has caused the company’s shares to drop by 3.8%, reaching a value of around $30 on Tuesday. In contrast, the S&P 500 and Dow Jones Industrial Average experienced a 0.8% and almost 0.9% decrease, respectively.

It is quite unimaginable, but U.S. Steel could possibly end up in the hands of private equity or be absorbed by a larger entity. The history of this company is both fascinating and filled with important lessons for investors.

U.S. Steel has been in existence since 1901 when John Pierpont Morgan merged Andrew Carnegie’s steel company with several others, creating a new firm with a market value of over $1 billion. This made it the first billion-dollar corporation in America.

At the time, steel was in high demand as an alloy of iron and carbon, serving as an excellent construction material for buildings and bridges. U.S. Steel dominated the market by shipping approximately eight million tons of steel in 1901, which accounted for about one-third of the global total.

However, U.S. Steel’s dominance gradually declined over the years. In 2022, the company shipped around 15 million tons of steel, representing an average annual growth rate of approximately 0.5%. This total now only amounts to about 0.7% of the world’s steel production.

The shift in steel production has predominantly moved towards the East, with China emerging as the world’s leading steel manufacturer. In 2022 alone, China produced roughly 1.1 billion tons of steel, surpassing 50% of the global total.

Throughout history, various commodity producers have held the title of the most valuable companies in the world. Be it U.S. Steel, oil giants like Exxon Mobil or Saudi Arabian Oil Co (Aramco), or even DuPont, which was propelled by the strength of plastics in the 1950s.

The potential end of U.S. Steel as an independent entity marks a significant turn in American stock trading history. It serves as a reminder of the ever-changing dynamics of industries and how global shifts can affect even the most iconic companies.

The Pitfalls of Being the Most Valuable Company

Commodity producers rarely maintain their number one ranking for long, and their performance tends to suffer after reaching the top spot. U.S. Steel, for example, experienced a peak in 1929 but its stock only returned an average of 5% per year over the past century. This is about half the rate of the Dow Jones Industrial Average. Similarly, both DuPont and Exxon underperformed the U.S. stock market in the 10 years following their rise to prominence.

Tracking returns over such a long period is challenging, and companies themselves aren’t always helpful in providing accurate data. Therefore, these figures should be viewed as approximations.

This historical warning should be heeded by investors in the electric vehicle (EV) sector, particularly those eyeing the potential boom in commodities like copper and lithium. As Tesla disrupts the traditional auto business with its battery-powered electric vehicles, it’s important to learn from the past.

Even Tesla investors might want to take note of history. In the 1920s, General Motors (GM) became the world’s most valuable company but ultimately underperformed the market over the next 10 years. One of GM’s primary issues was its overvaluation. In 1927, its stock traded at around 30 times earnings, while the S&P 500 traded closer to 15 times earnings. By 1937, GM shares were trading closer to 10 times earnings. Despite weathering the Great Depression and remaining profitable, investor interest waned.

Currently, Tesla stock trades at 70 times estimated 2023 earnings. Achieving lasting success and justifying such a high multiple will require strong performance in the coming years.

In contrast, Apple became the world’s most valuable company in 2012 and has consistently outperformed the S&P 500 since then, delivering an average annual return of approximately 21%, surpassing the market by 10 percentage points.

Apple’s success underscores the importance of investing in profitable businesses. In 2012, the company’s services segment accounted for less than 10% of total sales. By 2022, it had grown to nearly 20% of sales.

However, Apple’s triumph also serves as a cautionary tale for investors. It reveals that simply selling stocks because they are valuable is not wise. Long-term stock returns are determined by the underlying strength of the business and competent management.

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