Operational Issues Reemerge At U.S. Steel

Reviewing United States Steel Corporation X's first-quarter results, Jefferies said operational issues have reemerged, weighing hard on the flat-rolled segment.

Technical Take

The stock was down a whopping 20.25 percent at $24.85 in pre-market trading. The 200-day simple moving average is currently at $28.08 and could present support to the stock, considering it is headed southward in reaction to the results. If this support doesn't hold, the stock could look to cling onto a long-term support around the $22 area.

Q1 Print

Analysts Seth Rosenfeld, Martin Englert and Alan Spence noted that United States Steel reported a first-quarter loss of $0.83 per share, wider than both the $0.22 per share loss they estimated and the consensus estimate for a loss of $0.35 per share. The adjusted EBITDA came in at $74 million, below their $220 million forecast and the consensus of $244 million, the analysts added.

The analysts clarified that the adjusted results exclude $35 million of charges associated with the closure of Tubular assets but include $20 million of LIFO expense compared to the $40-million income in the previous quarter within the flat-rolled business.

Problems Galore At Flat Rolled

Jefferies attributed the $63-million operating loss to a 9-percent revenue miss, higher costs and operating expenditure, with the problem centered on its flat-rolled business. Outlining the problems at the flat-rolled segment, Jefferies said:

• Volumes: Down 6.6 percent.
• ASP: Down 2.6 percent.
• Revenues: Missed estimates By 12.1 percent.
• Operating Loss: $90 million or $37 per ton versus Jefferies' Estimate for $119 million operating profit or $46 per ton profit, as higher raw material costs, outage expense, restarts and a $60-million net sequential change to LIFO expense served as drags.

The Bright Spots

Jefferies noted that tubular and Europe ringed in results modestly better than expected, with an operating loss of $57 million in tubular, $13 million above forecast and income of $87 million in Europe versus forecast of $35 million.

Explaining the better-than-expected results in tubular and Europe, Jefferies said, "Sequentially better earnings in USSE stemmed from improved ASP's principally, partly mitigated by lower volumes and increased raw material costs. Tubular earnings increased QoQ as a result of higher ASP's, volumes, reduced spending and inventory write downs, partly offset by increased substrate costs."

Accounting Changes A Tailwind

Jefferies sees the accounting change the company effected in changing the accounting for PP&E from a group method to unitary as a tailwind. This, according to the firm, would allow the company to capitalize an increased portion of its maintenance/outage spend, provided investment is associated with extended asset life, helping to trim operating expenses by $175 million year-over-year.

Guidance Disappoints As Well

For 2017, the company expects EBITDA of $1.1 billion, net earnings of $260 million and earnings per share of $1.50. The firm indicated that the EBITDA guidance trails its previous estimate of 1.4 billion to $1.8 billion and the company's previous guidance of $1.3 billion. This is despite market conditions improving since last quarter.

The firm also noted the management's commentary that earnings would be impacted by efforts to accelerate "asset revitalization" plans, with annual costs expected to increase by $300 million in 2017 versus previous guidance of $200 million.

"This may be the best long-term strategic choice for the company to pursue, and it may also be an increasingly necessary step following years of under spending. But, the disruption caused by these efforts will ultimately cap X's ability to participate in currently favourable markets," Jefferies opined.

Jefferies continues to rate U.S. Steel a Buy, with a $50 price target.

At last check, shares of U.S. Steel were down 26.06 percent at $23.01.

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