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U.S. Steel Stock Rises After Earnings, But It’s Still Stuck in a Bad Year for Steel
By Al Root
Oct. 31, 2019 7:22 pm ET
Photograph by Dhiraj Singh/Bloomberg
United States Steel reported third-quarter numbers after the close of trading on Thursday and beat Wall Street expectations—sort of. The company managed to beat its own lowered guidance, but the surprise isn’t great news. Earnings and sales this year are way down compared to 2018. It’s been a tough year for old steel mills. Industry pricing and volumes are down. That’s one reason U.S. Steel is investing in new technology—the kind its upstart competitors use—to manage costs.
U.S. Steel (ticker: X) pre-announced weak results in September, saying third-quarter earnings before interest, taxes, depreciation and amortization, or Ebitda, would be just $115 million. Wall Street was expecting $190 million and cut estimates after the news release. Later —in October, after the quarter was finished—U.S. Steel raised guidance to about $139 million. Wall Street in turn raised estimates to an average of $132 million. Turns out earnings were only a little better than feared. U.S. Steel earned $144 million in Ebitda in the third quarter—thus beating analyst estimates.
The quarter mirrors the year U.S. Steel has had. 2019 started with higher expectations, but things didn’t work out as stakeholders had hoped. Trump’s tariffs on foreign steel boosted domestic steel prices and global raw materials spiked, which also should have boosted U.S. steel prices. But demand disappointed, leaving U.S. Steel battling higher costs after being forced to idle its steel-making capacity.
“While market headwinds persist, we continue to focus on what we can control, including re-scoping our asset revitalization investments and reducing fixed costs,” said CEO David Burritt in the company’s news release. “We also completed three financing activities since the quarter ended, which delivered approximately $1.1 billion of incremental capital to further support our strategy.”
To execute the strategy, the company plans to spend on new assets, including minimill technology—the kind that Nucor (NUE) uses. It’s a big departure for the oldest steel company in America. The more compact minimills make steel from scrap metal, while U.S. Steel makes steel from iron ore and coal in giant blast furnaces.
“I am primarily looking for how they are going to afford investments,” independent steel analyst Aldo Mazzaferro told Barron’s when asked about the quarter. He identifies $3.5 billion in new capital spending projects but only $1.1 billion has been raised. “The key question: How much more equity do they need to raise?”
It’s great question. The earnings release gives no clues about how the firm plans to raise money for modern equipment. Investors looking for more detail about U.S. Steel’s investments will have to wait until Friday, when the company will host an earnings call at 8:30 a.m. Eastern time.
At a recent check, shares were up 6.4% in after-market trading after the surprise Ebitda “beat.” But as of Thursday’s closing price, shares are down about 35% since January, far worse than the 18% gain the Dow Jones Industrial Average has seen in the same period. What’s more, since the first guidance cut in September, U.S. Steel stock is down about 8%. Again, it has been a tough year for steel.