U.S. Steel Rises After Goldman Call

U.S. Steel stock is moved to Goldman's conviction buy list.
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(U.S. Steel item upgraded for closing U.S. Steel stock prices and to provide further detail on Goldman Sachs' bullish call Thursday.)

NEW YORK (

TheStreet

) --

U.S. Steel

(X) - Get Report

shares spiked sharply on Thursday before giving back most of those gains later in the session after

Goldman Sachs

(GS) - Get Report

put the stock on its "conviction buy list."

Goldman's steel analyst, Sal Tharani, justified Thursday's call largely on valuation. The firm's economists, like most other bulge-bracket forecasters, are confident that the economic recovery is sustainable, Tharani wrote in a research note, "and we therefore see recent weakness in U.S. Steel Group stock as a good entry point."

Since

reporting first-quarter results

on April 27 and predicting a return to profitability in the second period, U.S. Steel shares had declined 12% -- until Thursday's session, that is, when the Goldman call appeared to boost the stock.

Shares of the Pittsburgh manufacturing icon climbed as high as $57.96 Thursday before closing the regular session at $55.98, up 95 cents, or 1.7%. Volume eclipsed 23 million shares, compared with daily average turnover of 17.3 million over the last three months.

Like many others, Tharani is bullish on U.S. Steel because of the company's vaunted vertical integration, which sets it up to benefit more than most of its peers from rising global steel prices.

That's because U.S. Steel controls its own iron-ore sources through a series of so-called "captive mines" in the Iron Range of Minnesota.

As Tharani noted in his report Thursday, global steel production (mostly out of China) has continued to increase and this, in turn, has pushed raw materials prices sharply higher over the last 12 months.

As the price of iron ore and coking coal rises, so does the global price of steel. And because

U.S. Steel has fixed raw materials costs

, those elevated steel prices will translate into cash that drops directly to the company's bottom line.

"Even if steel prices were to remain at current levels, U.S. Steel's margins should expand significantly due to the company's unique position of vertical integration into iron ore," Tharani wrote.

U.S. Steel's vertical integration allows it to avoid the fate of producers such as

AK Steel

(AKS) - Get Report

, which must buy its ore from the likes of

Cliffs Natural Resources

(CLF) - Get Report

. AK Steel warned when it

reported first-quarter numbers

that the rising cost of iron ore would likely hurt its profits in the second quarter and beyond.

The world's biggest iron-ore miners earlier in the year succeeded in forcing steelmakers to concede to a shorter-term pricing regime tied to spot-market prices. The moves upended a system, in place since the 1960s, that had settled contracts for the crucial steel feedstock on an annual basis.

Steelmakers without captive mines continue to complain about the change. An executive at

Tata Steel

, the big Indian producer, told the trade publication

Steel Business Briefing

that the new system will likely lead to needlessly high prices for the finished metal.

Tharani has a 6-month price target of $73 on U.S. Steel stock. As of Wednesday's close, the shares traded at $55.03.

Reasons for caution remain, however, Tharani said. "Risks to our view and price target include a significant decline in the auto production in the U.S., a significant weakness in European economies, a sharp decline in Chinese steel production and a sharp decline in rig counts." U.S. Steel is a major producer oil-drilling pipe, products referred to as oil country tubular goods.

-- Written by Scott Eden in New York

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>>AK Steel Iron Ore Costs May Hurt Results

>>U.S. Steel Sees Return to Profit

>>Iron Ore Upheaval Reaches U.S.

Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.