Wary Of Lower Steel Prices Ahead, CLSA Reiterates A Sell Rating On US Steel

United States Steel Corporation X reported 2Q adj. operating EPS ahead of expectations on higher margins. CLSA’s David Lipschitz maintained a Sell rating on the company, while raising the price target from $10 to $17. The analyst mentioned, however, that steel prices could decline further.

US Steel reported its 2Q16 adj. operating loss at $0.31 per share, significantly better than the CLSA estimate of $1.25 per share loss and consensus expectation of $0.49 per share loss. Analyst David Lipschitz raised the loss per share estimate for 2016 from $2.31 to $0.23. The loss per share estimate for 2017 has been lowered from $0.14 to $0.69, reflecting higher contracting prices.

Lipschitz expects steel prices to decline further, citing soft demand and record-high arbitrage levels.

Outlook

US Steel projected 2016 EBITDA at around $850mn, reflecting steel prices at the current levels. The company also forecasted flat US shipments in 2H. US Steel indicated additional Carnegie project benefits of $115mn, which takes the estimate for total improvements to $645mn in 2016. The company also expects DD&A at around $505mn and pension benefit cash payments of about $150mn.

“We remain cautious on streel prices as demand remains weak and streel lead times have started to contract. We also believe imports will eventually come back to the US market on record-high arbitrage levels. With our belief in lower steel prices, the stock appears overvalued,” the analyst wrote.

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