Steelmaker United States Steel (X) surprised the Zacks Consensus Estimate positively by 36.73% in the first quarter. The company posted adjusted earnings of 67 cents a share, outperforming the Zacks Consensus Estimate of 49 cents. However, things are not as rosy as one might infer as the company was recently downgraded by Fitch Ratings on account of its high fixed costs and debt levels.
First Quarter Flashback
Net loss (as reported) widened roughly two-and-a-half-fold year over year to $219 million (or $1.52 per share) in first-quarter 2012 from $86 million or 60 cents reported a year ago.
Revenues improved 6.3% year over year to $5.2 billion, above the Zacks Consensus Estimate of $4.9 billion.
U.S. Steel's reportable segments and Other Businesses reported income of $295 million, or $52 per ton, in the first quarter of 2012, compared with income of $4 million, or $1 per ton, in the first quarter of 2011.
The company reported loss from operations of $73 million in the quarter compared with a loss from operations of $91 million a year-ago.
U.S. Steel expects that all three of its segments will yield positive results in the second quarter and overall results will remain consistent with the first quarter. However, higher maintenance costs are expected to have an impact on the Flat-rolled segment.
We have discussed the quarterly results at length here: U.S. Steel Beats in 1Q
Agreement – Estimate Revisions
Estimates for U.S. Steel have barely moved over the past week. Out of 14 analysts covering the stock, just 2 have decreased their earnings estimates for fiscal 2012 over the past 7 days with none moving in the opposite direction. None of the 11 analysts covering the stock have altered their estimates for the second quarter in the last week.
Estimates for 2012 demonstrate a negative bias over the last 30 days with 7 (out of 14) analysts having downgraded their forecasts with 4 going in the opposite direction. For the second quarter, estimates are negatively inclined over the past month with 6 (out of 11) analysts lowering their forecasts as compared to 1 positive revision.
Magnitude – Consensus Estimate Trend
Estimates for the second quarter and fiscal 2012 haven’t moved much over the last week, with the quarterly estimate remaining the same and the fiscal 2012 estimate having trimmed by 4 cents.
The decline has been greater over the last month with estimates for the second quarter and fiscal 2012 decreasing by 19 cents and 9 cents, respectively. The current Zacks Consensus Estimates for the second quarter and 2012 are 64 cents and $2.38, respectively.
Neutral on U.S. Steel
Pittsburgh, Pennsylvania-based U.S. Steel is a leading steel manufacturer in the U.S. and the fifth largest in the world. It produces and sells steel mill products – including flat-rolled and tubular products – in North America and Europe. U.S. Steel has a global annual raw steel production capacity of 31.7 million tons (24.3 million tons in North America and 7.4 million tons in Europe).
The company is focused on growing its business by developing new steel products and uses for steel. For this reason, it has opened research centers in Pittsburgh, Pennsylvania, and Kosice, Slovakia and an automotive center in Troy, Michigan.
U.S. Steel divested its Serbian operations and this can be considered as a good move since they were dragging down the company’s earnings. U.S. Steel is also focused on expanding its global reach. The company looks to get into operations where costs are low and has developed plants in Slovakia, serving the Eastern European market, for that reason. Its acquisition of Stelco is also an example of this strategy.
However, the conditions in the industry do not seem conducive for U.S. Steel and it might face pricing pressures due to oversupply. Rapid growth in Chinese steel output and competition from peers might contribute to the decline in prices of steel. The company is weighed down by its high fixed costs along with lower capacity utilization, resulting in a cloudy forecast going forward.
U.S. Steel competes with ArcelorMittal (MT) and POSCO (PKX). Currently, we have a long-term (more than 6 months) Neutral recommendation on the stock. The company currently holds a Zacks #3 Rank, reflecting a short-term (1 to 3 months) Hold rating.
About Earnings Estimate Scorecard
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