At the dawn of the 20th century, America dominated steel. The U.S. share of global steel production in 1901 was about 50%. Today? Only about 5%
1901 was the year Andrew Carnegie sold Carnegie 亚博系列全平台入口 to John Pierpont Morgan Sr. for $480 million dollars鈥攃reating (ticker: X). Back then, U.S. 亚博系列全平台入口 was the largest steelmaker in the world. Early on, its stock was a winner. U.S. 亚博系列全平台入口 stock rose from $55 per share in 1901 to $260 in 1929鈥攔ight before the stock market crash. The shares haven鈥檛 been back to $260 since, but the company is still making metal 117 years after its formation. That鈥檚 an impressive feat.
The reason isn鈥檛 obvious, but it might mean that profits at U.S. 亚博系列全平台入口 improve. That鈥檚 a bold idea. Even if investors don鈥檛 think U.S. 亚博系列全平台入口 can (or will) stop making steel, following this analyst鈥檚 logic can help investors identify hidden values elsewhere.
鈥淯.S. 亚博系列全平台入口 has long term value because they make iron,鈥� says Aldo Mazzaferro. He鈥檚 a longtime steel analyst from Goldman Sachs now running an independent research boutique. Pig iron is the precursor to steel that comes out of a blast furnace. 鈥淚t wouldn鈥檛 be an easy transition for them to stop making steel, but it doesn鈥檛 necessarily mean they would make less money.鈥�
Mazzaferro said U.S. 亚博系列全平台入口 has trouble competing with 鈥渕inimills,鈥� facilities that make steel by remelting scrap using electric arc furnaces. Like the name implies, these facilities are smaller鈥攁nd cheaper to build and run鈥攖han the massive infrastructure U.S. 亚博系列全平台入口 owns. U.S. 亚博系列全平台入口 starts by mining its own iron and mixing it with coal in a blast furnace to produce pig iron. Oxygen is blown through the molten iron at supersonic speeds to turn pig iron into steel.
U.S. 亚博系列全平台入口 declined to comment.
But Mazzaferro argues that Nucor and other minimill operators can鈥檛 make pig iron. 鈥淵ou can鈥檛 satisfy all demand for steel with scrap, someone has to make iron,鈥� he said. 鈥淚t鈥檚 a radical proposal for sure, but I would bet if you could get the internal numbers they make their greatest profit margins and greatest free cash flows on the upstream [pig iron] products.鈥�
The idea of stopping all steel production is theoretical of course. There are legacy costs like pensions and environmental remediation, as well as existing employees to be considered. But it highlights two things investors should pay attention to: money losing divisions and replacement costs.
In the first case, shutting down or selling a struggling unit can make a business look much better than investors expect. And another way of stating Mazzaferro鈥檚 argument about U.S. 亚博系列全平台入口 is to say that mining and blast furnaces assets the company owns are worth more than today鈥檚 entire market value for U.S. 亚博系列全平台入口.