By United States Steel (ticker: X), one of the most renowned names in American stock trading history, may soon see its days as an independent publicly traded company come to a close. This development has been prompted by the company’s consideration of strategic alternatives, following multiple bids it received. One such bid came from steel peer Cleveland-Cliffs (CLF).
A Fascinating Legacy
Since its inception in 1901, U.S. Steel has captivated investors with its rich history and valuable insights. The company was formed through the merger orchestrated by John Pierpont Morgan, combining Andrew Carnegie’s steel company with several others. This move birthed a conglomerate with a market value exceeding $1 billion, making it the first billion-dollar corporation in America.
Shifting Tides and Challenges
While steel enjoyed its reign as a sought-after construction material for buildings and bridges, U.S. Steel’s dominance eventually diminished. In 1901, the company shipped roughly eight million tons of steel, accounting for approximately one-third of the global total. Fast forward to 2022, and U.S. Steel’s steel shipments amounted to about 15 million tons—a modest average annual growth rate of 0.5%. Moreover, this total represents a mere 0.7% of the global steel output.
It is worth noting that the demand for steel in the United States has reached a plateau, primarily due to the maturation of infrastructure projects. Most notably, China has emerged as the world’s leading steel producer, churning out approximately 1.1 billion tons in 2022—over 50% of the global total.
The Evolution of Industry Leaders
Throughout history, commodity producers have experienced lucrative seasons where they have become the most valuable companies worldwide. Notably, U.S. Steel, alongside oil giants like Exxon Mobil (XOM) and Saudi Arabian Oil Company (also known as Aramco), as well as DuPont (DD) during the 1950s when plastics surged in popularity, have all claimed the top spot.
As U.S. Steel explores its strategic alternatives, the possibility of it falling under private equity ownership or being absorbed into a larger entity looms large. This potential change marks a significant moment in the company’s journey, reflecting the ever-evolving landscape of the steel industry.
Commodities and the Perils of Being Number One
Commodity producers have a tendency to lose their top spot and often struggle to maintain their success once they attain it. This trend is evident when examining the performance of U.S. Steel stock, which reached its peak in 1929. However, an analysis by _ revealed that U.S. Steel stock has only generated an average annual return of approximately 5% over the past century. This pales in comparison to the Dow Jones Industrial Average, which has delivered double that rate. Similarly, both DuPont and Exxon underperformed the broader U.S. stock market in the decade following their rise to the top.
(Tracking returns over a century is challenging, and one must approach these figures with caution as they are only approximate.)
This serves as a cautionary tale for investors in electric vehicle (EV) companies such as Tesla, which have been driving the demand for commodities like copper and lithium. While Tesla’s disruption of the traditional auto industry through battery-powered electric vehicles creates excitement, history suggests that caution might be warranted. General Motors, for example, held the title of the world’s most valuable company in the 1920s but failed to outperform the market in the subsequent decade.
GM’s underperformance appears to be linked to valuation issues. In 1927, GM’s stock traded at around 30 times earnings while the S&P 500 traded at just 15 times earnings. By 1937, GM’s stock was trading at only 10 times earnings. Despite weathering the storm of the Great Depression and remaining profitable, investor sentiment towards GM cooled significantly.
Turning our attention back to Tesla, its stock currently trades at a lofty multiple of 70 times estimated 2023 earnings. For this valuation to be justified in the years ahead, everything must go exceptionally well.
In contrast to GM’s struggles, Apple’s rise to become the world’s most valuable company in 2012 has been a resounding success. Since then, Apple has consistently outperformed the S&P 500, delivering an average annual return of approximately 21%, which is 10 percentage points better than the market.
Apple’s remarkable performance underscores the importance of continuing to invest in profitable businesses. In 2012, Apple’s services division accounted for less than 10% of total sales, but by 2022, it contributed to almost 20% of sales.
While Apple’s success is admirable, it also serves as a word of caution for investors. The value of a company alone should not dictate investment decisions. Instead, the underlying strength of the business and the competence of its management team play a vital role in determining long-term stock returns.
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