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Will Lower Prices Hurt U.S. Steel's (X) Earnings in Q4?

Anindya Barman

United States Steel Corporation X is scheduled to come up with its fourth-quarter 2018 results after the bell on Jan 30.

The steel giant saw higher profits in the third quarter, driven by a significant increase in earnings in its Flat-Rolled unit and higher steel prices. It logged net earnings of $291 million or $1.62 per share in the quarter, up roughly 98% from $147 million or 83 cents a year ago. Adjusted earnings of $1.79 a share were in line with the Zacks Consensus Estimate.

Revenues rose roughly 15% year over year to $3,729 million in the third quarter, exceeding the Zacks Consensus Estimate of $3,706.1 million.

U.S. Steel has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, delivering a positive average earnings surprise of 12.3%.

Shares of U.S. Steel are down around 49% over a year, underperforming the industry’s decline of roughly 31%.


 

Let’s see how things are shaping up for this announcement.

Factors to Watch For

U.S. Steel, in its third-quarter call, noted that it expects adjusted EBITDA for the fourth quarter at roughly $575 million. The company also cut its adjusted EBITDA guidance for 2018 to $1.8 billion from its earlier view of around $1.85-$1.90 billion.

The company envisions results in the Flat-rolled unit to continue to improve on the back of higher shipments and reduced maintenance and outage costs, partly masked by lower average realized prices.

For the Tubular unit, U.S. Steel sees results to improve mainly due to higher shipments, partly offset by lower average realized prices. However, it expects results in the European segment to decline due to inventory revaluation adjustments associated with volatility in raw material prices. The company is seeing unfavorable impact of higher iron ore and coal costs in this unit.

The Zacks Consensus Estimate for revenues for U.S. Steel for the fourth quarter is $3,752 million, reflecting an expected increase of roughly 19.8% on a year over year basis.

U.S. Steel is seeing strong market conditions with stable end-user steel consumption. It remains focused on improving its cost structure and operations on a sustainable basis through its “Carnegie Way” initiative that includes actions such as manufacturing process/logistics improvements and savings on SG&A costs.

As part of the Carnegie Way initiative, the company is implementing an asset revitalization plan aimed at improving its profitability and competitiveness. Carnegie Way actions are expected to deliver meaningful benefits.

U.S. Steel is also expected to benefit from higher expected steel shipments in the December quarter. Shipments for the Flat-Rolled segment are projected to see a 5.3% increase on a sequential comparison basis as the Zacks Consensus Estimate for the fourth quarter is pegged at 2,800,000 tons. For the Tubular segment, shipments for the fourth quarter are expected to rise 3.3% sequentially , as the Zacks Consensus Estimate is 190,000 tons.

Higher steel prices supported the performance of the company’s Flat-Rolled unit in the third quarter. However, lower expected realized prices are likely to hurt margins of the segment in the fourth quarter. U.S. Steel, in its third-quarter call, said that it is witnessing lower customer order rates due to falling spot and index prices.

The Zacks Consensus Estimate for average realized price for the Flat-Rolled unit for the fourth quarter is pegged at $826 per net ton, which represents an expected 3.8% decline from the sequentially prior quarter.

Steel prices weakened during the fourth quarter on concerns over a slowdown in steel demand in China, the world’s top consumer, amid a cooling Chinese economy. Signs of weakness across the country’s major steel end-use markets – construction and automotive – have clouded steel demand outlook. In fact, after rallying to multi-year highs on the back of Trump administration’s imposition of 25% tariffs on imported steel, U.S. steel prices have now fallen back to the levels seen prior to the tariff announcement in March 2018.

Lower prices are also likely to weigh on the performance of the company’s Tubular segment. Average realized price for the Tubular segment is expected to decline around 0.9% sequentially as the Zacks Consensus Estimate for the fourth quarter is $1,587 per net ton.

What the Zacks Model Says

Our proven model does not show that U.S. Steel is likely to beat estimates this quarter. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Earnings ESP: Earnings ESP for U.S. Steel is -4.05%. This is because the Most Accurate Estimate is currently pegged at $1.81 while the Zacks Consensus Estimate stands at $1.89. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: U.S. Steel currently carries a Zacks Rank #5 (Strong Sell). Note that we caution against stocks with a Zacks Rank #4 (Sell) or #5 going into the earnings announcement, especially when the company is seeing negative estimate revisions.

United States Steel Corporation Price and Consensus

 

United States Steel Corporation Price and Consensus | United States Steel Corporation Quote

Stocks That Warrant a Look

Here are some companies in the basic materials space you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

New Gold Inc. NGD has an Earnings ESP of +166.67% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Teck Resources Limited TECK has an Earnings ESP of +10.36% and carries a Zacks Rank #3.
 
Franco-Nevada Corporation FNV has an Earnings ESP of +3.05% and carries a Zacks Rank #3.

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