U.S. Steel (X 32.34, -3.47, -9.69%), a major producer of steel in the U.S. and Europe, is trading lower today after reporting Q2 results last night.
United States Steel is an integrated steel producer of
flat-rolled (primarily used in appliances and automotive products) and tubular
(primarily used for oil pipelines) steel products with major production
operations in North America and Europe.
Unlike mini-mills in the pattern of Nucor (NUE) or Steel Dynamics (STLD), which make new steel by melting scrap steel in an electric arc furnace, an integrated producer makes steel from raw materials (iron ore and coke) using what's called a blast furnace.
Of note, U.S. Steel is continuing to undergo what it calls its asset revitalization program for its Flat-Rolled segment. It's a $2 bln investment plan, including about $1.5 bln being spent over the course of 2017 to 2020. The intended outcome of the plan is to see U.S. Steel revitalize its assets in order to increase profitability, productivity, and operational stability while reducing volatility. While this is a large program, the majority of projects associated with it are not complex projects. Due to the smaller nature of many of the projects, X does not have to complete the entire program in order to start seeing benefits. However, the program will have some impact on financial results from time to time.
Turning to the Q2 results, adjusted EPS came in at a $1.46, which was much better than market expectations and up sharply from $1.07 in the prior year period. Revenue rose 14.8% year/year to $3.61 bln, which was also above market expectations. Adjusted EBITDA is always a key metric for U.S. Steel, and it's the only metric it provides guidance for. It came in at $451 mln in Q2, above prior guidance of $400 mln, and well above the year ago level of $376 mln. For Q3, X guided to adjusted EBITDA of approximately $525 mln, which is below market expectations. They also increased their 2018 adjusted EBITDA guidance to $1.85-1.90 bln from prior guidance of $1.70-1.80 bln.
Looking ahead to Q3, X expects that its Flat-rolled segment results will continue to improve as more of its adjustable contract and spot shipments realize the benefit of Q2 price increases. This will be partially offset by higher planned outage costs. X expects results for its Tubular segment to turn positive in Q3 as selling price increases catch up to the rising substrate costs seen in the first half of the year. However, management expects results for its European segment to be lower in Q3, primarily due to planned outages that coincide with normal seasonal customer demand patterns.
The stock is trading lower despite what was a pretty decent quarter. It seems the Q3 EBITDA guidance is being taken as a disappointment and is now weighing on the stock. With steel prices rising, investors were expecting a stronger Q3 outlook. The stock has been in a narrow trading range in the mid to high $30's. But it seems like this report will not be the catalyst to get the stock back on an uptrend.