WHX: Struggling Firm a Steal

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Believe it or not, one of the best investments in the steel industry is a company mired in a four-month-long strike.


(WHX:NYSE), the parent company of Wheeling-Pittsburgh Steel, is trading at just 8 3/4 a share. That's far behind its $30.52 a share book value and also trails its cash per share level of nearly $16.

Investors, however, are looking at something else.

"People are focusing on the fact that it is not making any money in the strike and that steel prices are weak," says Scott Black of Boston's

Delphi Management

, which seeks value investments and owns 174,600 WHX shares. "I think it's a value."

"Look at the company," adds Richard Aldrich, a steel industry analyst with

Lehman Brothers

. "It has $400 million in cash and doesn't have a lot of debt. Look at the downstream operations, which are worth a lot of money. And the stock price is below what the asset values would seem to fetch."

One other measure of the company's cheap stock price: WHX's enterprise value per ton trails its competitors, according to Aldo J. Mazzaferro Jr., an analyst with

Deutsche Morgan Grenfell

. Enterprise value per ton is the company's net debt plus its market capitalization divided by its shipments. Using that measure, WHX is just under $400 a ton, far behind competitors such as

USX-U.S. Steel Group

(X:NYSE), at $600,

Bethlehem Steel

(BS:NYSE) at $500,

AK Steel Holding

(AKS:NYSE) at $470 and

Inland Steel Industries

(IAD:NYSE) at $500.

But Aldrich and Mazzaferro still shy away from the stock with their neutral ratings. (Neither of the analysts' firms have done any recent underwriting for WHX.) Why? WHX is considered a second-tier steelmaker behind the likes of U.S. Steel and


(LTV:NYSE). For instance, WHX, the nation's 11th biggest steelmaker, has little exposure to the industry's most sought-after market, automobile makers.

And WHX has given investors plenty of other reasons to worry, including the simple fact that it's a steelmaker, which means it's susceptible to the cyclicality of its markets. Currently, demand is strong but prices are weak because of soaring imports and rising capacity in the United States. If supply keeps growing, prices could come under more pressure.

Then there's the strike. The United Steelworkers union went on strike Oct. 1 after the company and the union were unable to reach an agreement on a new contract. The central issue is the company's pension plan. The union, which represents 4,500 workers there, wants a defined-benefit plan, under which workers would know exactly how much they would receive when they retire. But WHX wants to stick with a defined-contribution plan, under which retirement payouts vary depending on how well the plan's assets are invested. Switching would produce a substantial liability for the company, analysts say.

WHX tried to remedy this by taking two runs at acquiring defense conglomerate


, which had a vastly overfunded pension plan. But WHX was beaten back and Teledyne ultimately merged with

Allegheny Ludlum

, forming

Allegheny Teledyne


WHX's run at Teledyne actually spurred many investors to dump its stock over concerns that WHX was no longer focusing on its core business. That concern was bolstered by the man at the helm of WHX -- Ronald LaBow, a former money manager at

Neuberger & Berman

. Was WHX simply LaBow's investment vehicle, investors asked. After all, it did buy half of a dog-racing track in 1994 in the steel company's hometown of Wheeling, W.Va., which left investors howling.

But LaBow is one of WHX's strengths, say observers, who add that even the dog track was highly profitable. "LaBow is a smart guy," says Black at Delphi Management. Indeed, LaBow engineered WHX's emergence from Chapter 11 bankruptcy protection in 1991 and oversaw its transformation into a more modern, more cost-efficient steelmaker. With U.S. Steel alumnus James Wareham as chief executive, WHX has bulked up its steel processing operations, which carry higher profit margins than basic steelmaking.

Of course, WHX now needs to get its employees back at work, which observers say eventually will happen, though it may take a while longer as the two sides battle. Says Mazzaferro, the Deutsche Morgan Grenfell analyst, "For the time being it's a cheap stock. It probably won't do much until the strike ends."

By Erle Norton