United States Steel Corporation (X) is scheduled to release its third-quarter 2010 results on Tuesday, July 27, 2010 before the market opens.
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 also engaged in other operations, including coke and iron ore pellets, related to its core business.
Although U.S. Steel has not provided any financial guidance for the second quarter, it expects to record profits in all three operating segments in the second quarter of 2010 as business conditions improve, particularly in the Flat-rolled segment. The Tubular segment is also benefiting from both increased order rates and a decline in inventory levels.
The business environment is expected to show improvement in Europe. Increasing demand in the end markets has pushed production levels. Yet inventories in key end-markets in North America, such as automotive and service centers, remain below historical averages, and flat-rolled product imports are also below average.
Currently, the Zacks Consensus Estimate stands at 63 cents per share in contrast to the year-ago estimate of a negative $2.92 per share. For full-year 2010, the Zacks Consensus Estimate is pegged at $1.72, which reflects annual growth of a robust 116.29%. U.S. Steel has missed the Zacks Consensus Estimate in 3 of the trailing 4 quarters, with an average surprise of 7.63%. The third quarter Zacks estimate has an upside potential of 1.59% while the full-year estimate has a downside potential of 34.88%.
First Quarter Highlights
U.S. Steel reported a net loss of $157 million or $1.10 per share in the first quarter of 2010 compared to a net loss of $267 million or $1.86 per share in the fourth quarter and a net loss of $439 million or $3.78 per share in the year-ago quarter. This was the fifth consecutive quarter that the company has reported a net loss. The net loss per share came in at much lower than the Zacks Consensus Estimate of a loss of $1.44. Sales came in at $3.9 billion, up 16.1% sequentially and up 42% year over year. United States Steel reports in four segments including Flat-Rolled Product, U.S. Steel Europe (USSE), Tubular Products and Other Businesses.
Management stated that overall losses were significantly reduced sequentially due to improving business conditions and a strong operating performance. U.S. Steel returned to profitability in Europe and results were strong for the Tubular segment.
Agreement of Analysts
Analysts have primarily remained optimistic on U.S. Steel, encouraged by the company’s positive near-term outlook. For the third quarter of 2010, out of the 12 analysts covering the stock, 4 and 3 have upped their EPS estimates over the last 7 and 30 days, respectively, with no revisions in the opposite direction.
However, analysts are apprehensive about the long term, with the current downtrend in the steel prices and volumes and the company’s high debt. Outlook on the stock remains negative, mostly due to debt and profitability concerns. For the fourth quarter year 2010, out of the 10 analysts covering the stock, 3 and 4 have made a negative revision to their estimates, over the last week and month, respectively, with none moving up. We see a similar trend for the full-year 2010.
Magnitude of Estimate Revisions
Although analysts have upped their estimates, the magnitude for the immediate quarter was not largely affected. Over the last 7 days, we see the EPS estimate rise by a penny. Negative sentiments have pushed the third quarter and full-year 2010 estimates down by 2 cents and 8 cents, respectively, over the last week.
Zacks Recommendation
U.S. Steel incurred losses in the whole of 2009 as well as in the first quarter of 2010. Rising supplies from China, low demand from the automotive and residential sectors and rising labor costs are affecting its operations.
Given the sharp deterioration in energy prices and drilling activity, coupled with the continued rise of imports, U.S. Steel may face difficulties in its Tubular business. We believe that the benefits of expected increases in the average realized prices and higher shipments in the Tubular segment should be offset by increased costs for steel substrate. Additionally, steel prices and volumes have showed a downtrend recently, which should impact operations negatively in the long run.
However, U.S. Steel’s European operations are showing signs of positivity with the improving economy. This should drive results in the Tubular segment. U.S. Steel also benefits from a vertically-integrated operation. The company sources about 75% to 80% of its coke and iron ore requirements from owned and/or operated facilities in North America. Raw material costs for steelmaking are rising, and U.S. Steel has been the leading beneficiary using its integrated business model.
Last week, U.S. Steel’s nearest rival, Nucor Corporation (NUE), reported a profit of $91 million or 29 cents per share in the second quarter of 2010 reversing net losses of $133.3 million or 43 cents per share in the same quarter of 2009. The company beat the Zacks Consensus Estimate by 3 cents per share. Sales jumped 69% on a 25% increase in average sales price.
However, Nucor expects to be negatively affected by a slowdown across all its product lines due to uncertainty in the overall economy. The most challenging markets for its products are associated with residential and non-residential construction.
We also remain cautious on U.S. Steel’s high leverage. The company reported total debt of $3.8 billion against cash and cash equivalent of $1.4 billion as of March 31, 2010.
Currently, U.S. Steel has a short-term (1 to 3 months) Zacks #3 Rank and a long-term (6 months and higher) Neutral recommendation.
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