US Steel (X) is making a strong move (+10%) this morning after reporting impressive Q1 results last night. Adjusted EPS jumped 47% yr/yr to $0.47 per share, which was much better than expected. The market was looking for EPS to decline yr/yr, so this was a nice surprise. Revenue rose 11.1% yr/yr to $3.50 bln, which also was better than expected.
Adjusted EBITDA is a closely followed metric with US Steel, probably more so than with other companies. It rose 12% yr/yr to $285 mln, much better than prior guidance of $225 mln. Last quarter, X guided EBITDA sharply below market expectations, so it was good to see some upside.
Of note, US Steel has historically guided for adjusted EBITDA for the next quarter and full year in the earnings press release. However, earlier this year, X announced a change in policy. Going forward it will provide quantitative guidance later in the quarter. We wonder if the sell-off in the stock in January when X guided lower for EBITDA had any impact on X's decision to change its policy. While X is no longer guiding for adjusted EBITDA in the press release, it did say on the call that it currently expects adjusted EBITDA to be similar to Q1.
US Steel also announced a major upgrade at its Mon Valley Works plant. X said it will invest more than $1 bln to construct a new casting and rolling facility. CEO David Burritt says this "cutting-edge endless casting and rolling technology combines thin slab casting and hot rolled band production into one continuous process and will make Mon Valley Works the first facility of this type in the US, and one of only a handful in the world."
First coil production is expected in 2022, contingent upon permitting and construction. Burritt went on to say that "the new endless casting and rolling facility will replace the existing traditional slab caster and hot strip mill facilities. The technology will allow for optimization of the Mon Valley Works and other US Steel facilities without increasing...overall steelmaking capacity." This is a significant investment by US Steel, and it sounds like it will make that facility much more efficient.
The stock has slumped from $24 in late February to around $14 heading into the Q1 report last night on concerns about pricing in 2019 and weakness in Europe which is being hurt by a flood of imports. There has been talk of a "Sheet Tsunami" coming in 2021-2022, a time when Credit Suisse thinks there will be a huge influx of sheet entering the market. With all the negativity, it's good to see X get a bit of a bounce today.
In addition to the strong financials, we think another reason the stock is bouncing today is some strong commentary on the call this morning. Burritt seemed to dismiss the concerns about the flood of supply. He said, "We have all seen the headlines. Some on this call have even said U.S. Steel's competitive position has weakened, U.S. Steel can't compete with the recently announced capacity additions. We know the competition. We live it, and we welcome it. We don't fear it, but we respect it." That's a pretty candid and unusual statement for X to make. The point seems to be that X feels it will be just fine. This appears to be easing some concerns for investors as the stock is bouncing today.
Overall, this was a very nice quarter for US Steel and quite unexpected. Investors were bracing for a rough Q1 report following some negative commentary last quarter and based on weakness in Europe. However, the report wound up being much better than feared. Also, it's good to hear the CEO fight back on the concerns of a flood of sheet supply entering the market in a few years. This has been a concern for investors.