BlueScope Steel shares selling at a 38% discount

The BlueScope Steel Limited (ASX: BSL) share price closed yesterday at $11.65, which is a discount of 38% in comparison to its 52-week high. Is it undervalued, and should you buy?

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The BlueScope Steel Limited (ASX: BSL) share price closed yesterday at $11.65, which is a discount of 38% in comparison to its 52-week high.

I have recently spent some time reviewing Bluescope to assess the merit of buying BSL shares and have found various pieces of evidence that its shares might be trading below fair value. This evidence, and my conclusions about whether to invest or not, are detailed below.

Is BlueScope Steel undervalued?

BlueScope Steel recently announced an extension of their share buy-back program, which began in December 2018. In my opinion, a share buy-back program indicates that a company's management believe its shares are undervalued. If correct, this is an effective way to return profits to shareholders. A company that generates lots of cash that can then be returned to shareholders is great to own; however, companies that are able to invest this excess cash to generate further high returns are preferable.

Book value per share is another indicator that can be used to assess value. If you consider book value as a representation of net assets, then BSL shares are currently trading at a price below book value per share. In theory, this means you can buy assets in BlueScope Steel for less than what they are worth. However, intangible assets like goodwill should really be excluded when determining book value. This adjusted calculation reduces BSL's book value per share to below the current price.

The price to earnings ratio is another indicator often used to assess value, but I wouldn't suggest relying too heavily on this measure to determine if a share is cheap or not. The current multiple of just above 8, based on 2018 earnings, does not appear excessive.

Foolish takeaway

Although I have been able to find evidence that BlueScope Steel may be undervalued, I am not rushing to invest in this company. I believe BlueScope Steel's success will be tied to the price of steel as well as the strength of the Australian dollar.

Additionally, this company is in a capital intensive and cyclical industry. Until I have a better understanding of the future market conditions, I would prefer a larger margin of safety before investing.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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