United States Steel Corporation Earnings Be More Stable Through 2017

16 June 2016

Today, Merrill Lynch released its detailed report on United States Steel Corporation (NYSE:X) performance. The firm believes that the company is likely to post stable earnings going forward, amid sheet prices hike during the period. Taking this under consideration, the rating agency has upgraded the company’s stock performance from Underperform to Neutral. Furthermore, it affirmed $18 price objective, with reduced loss per share (LPS) from $2.60 to $0.57.

Even though different steel products have already witnessed a price increase, US Steel is anticipated to reflect benefit with a delay on the back of lagged sheet business and annual contract prices.

Year-end EBITDA Likely to Jump

In its last guidance call, the company had taken skewed approach to state $400 million Earnings before interest, taxes, depreciation and amortization (EBITDA) for year-end FY16, which was lesser than $424 million consensus estimates.

However, after incorporation of increased steel products’ prices, Merrill Lynch came up with a $673 million EBITDA. While stating this, the firm believed that the higher sheet demand is likely to continue supporting the price hike. It also foresees another price increment in near term yet lower scrap prices might challenge this hike.

US Steel’s Debt Reduction Plan

Last month, the company’s recent debt reduction activities have removed its near-term debt maturity risk after its placement of $980 million in 8.375% Senior Secured Notes due 2021. Additionally, better future cash flow on higher steel prices and the company’s steps to extend the debt maturity schedule are positive. This is likely to remove an overhang on the stock.
Sensitivities Attached with US Steel’s Price Movement

Merrill Lynch research analyst Timna Tanners stated certain possibilities that could deviate the price provided by her. On a positive side, the price objective could get improved if better-than-anticipated demand incurred for US Steel products. Furthermore, potential steel price’s outperformance could also develop the price target, especially if this is driven by better iron ore pricing, as US Steel is self-sufficient for 70% of its production.

On the flip side, these targets could likely get a hit if weaker-than-anticipated demand and price incur in the market. Besides, management’s lack of execution on its cost-cutting plan will hit the bottom-line earnings. Moreover, if the company failed to invest in assets as planned, it will result in operational risk. Lastly, marginal pressure from new supply and higher raw material costs will also squeeze the company’s earnings, and hence deviate from the currently-stated price target.

Other factors that could affect the company’s performance include the reversal of scrap prices in 3QFY16 from 2QFY16’s peak. A Strong dollar is also likely to attract importers. Although China faces prohibitive duties and other significant exporting countries have stiff margins against them, the threat continues from other steel producers that receive relatively lesser antidumping and countervailing duties.

Steel Buyers Perspective

The domestic steel buyers are maintaining a bullish tone with a few buyers forecasting mills that could raise prices further, but most seeing near-term strength sustained at least for that particular duration. Calm in the local steel market was attributed to typical summer softness. Buyers noted a decent demand, with a better market for construction and auto, but with weaker energy and agriculture. They further expect scrap contacts to retain flat prices over the summer, with potential weakness on more limited Turkish demand. Buyers noted limited import offers but some availability for 4QFY16/1QFY17 delivery at attractive prices. On the other hand, India, Vietnam, and other potential European countries that were not named in trade cases could steer extra tons to the US shores.
US steel price forecasts increased

Merrill Lynch had raised its forecasts for US sheet steel prices to reflect limited supply over the next several quarters. Learning from 1QFY15 and 3QFY15 performances amid Asian prices hike, the analyst tweaked her financial model accordingly. She projected hot-rolled coil (HRC) to an average $600 per ton at its 3QFY16 peak, while the same would ease down to $570 per ton in 4QFY16.

Other Sell-side Firms’ Reaction

Of 18 sell-side firms providing coverage on US Steel stock, three stated a Buy, nine suggested a Hold, while six firms advised a Sell. Among these, on June 13, 2016, Cowen indicated Market Perform with $18 price target. Previously, on June 10, 2016, Jefferies took an Underperform stance with $13 price target. On June 8, 2016, Credit Suisse had also covered US Steel Corporation, where it stated Outperform with $26 price target.

World Steel Association Report

Last month, the World Steel Association published “World Steel in Figures 2016.” In this report, the association gathered all major steel sector activities of the year. This data is stretched from apparent steel usage to crude steel production.

In regards to this publication, World Steel Director General, Edwin Basson stated: “In 2015, concern over excess capacity once again increased. Restructuring is not new; it is an ongoing process as old as the industry itself and it requires appropriate industrial policy developed by governments in cooperation with industry. Barriers to exit as well as social and environmental impacts need to be addressed and planned for. In today’s economic context it is ever more crucial that policies promote a level playing field to ensure that steel companies in one region are not put at a disadvantage with steelmakers from other regions or in relation to competing materials.”

In the report, it was stamped that China led CY15 with 803.8 million tons steel production. Japan followed it with 105.2 million tons of produced steel. India grabbed the third position with 89.4 million tons steel production; whereas the US secured the fourth position with 78.8 million tons steel fabrication.

The concern among investors is emerging pertaining to the steel supply glut over China’s massive production. The US and EU had already imposed hefty antidumping and countervailing duties in an effort to stop China from entering their domestic market. This means China will divert its focus towards another probable steel consumer, which is likely to imbalance another market. On the other hand, some market gurus hold the stance that despite these duties, China would remain interested in the US because domestic steel producers do not have enough capability to fulfill the requirements.


Source : businessfinancenews.com