US Steel (X) is now the third steel producer in as many days to guide EPS below consensus, following Nucor (NUE) on Monday and Steel Dynamics (STLD) yesterday. It was a pretty large miss as X expects adjusted EPS of approximately $0.40. Also, adjusted EBITDA guidance came in well below at $250 mln.
There is a lot to unpack here. First, X does not usually provide EPS guidance and we are not quite sure what to make of its decision to do so this time. It could be that management wants to be sure investors really understand how difficult the market is right now. It could also be that X wants all the bad news out now. It may not want to guide down for EBITDA then announce another miss with EPS when it reports full Q2 results next month. This is not a huge deal, we just wanted to point this out to investors.
Another thing that stands out to us is that X is citing softening end market demand. NUE mentioned weakening automotive markets and STLD said non-residential construction was weaker. But X seems to be broader in terms of its weakness. That's a little different and perhaps more pessimistic.
Probably the biggest news from X is that it plans to temporarily idle three blast furnaces (two in the US and one in Europe). Blast furnaces are huge pieces of equipment where integrated steelmakers melt iron ore and coke as part of the steelmaking process. You cannot easily just stop and start a blast furnace. It's a big decision to idle a blast furnace. That tells us that X views the steel market as quite bearish for the near term and it's deciding to cut production.
So, the big question is: why is X trading up despite the downside guidance? In fact, NUE and STLD also held up well after their guide-downs this week. STLD actually jumped 9% yesterday despite its guide-down. The reaction of all three stocks tells us that a lot of the bad news is already priced into these stocks. US Steel has fallen from just under $25 in late February to $14.58 yesterday. A year ago, the stock was at $35.
Also, investors are probably happy to hear that X is idling some blast furnaces. There is a steel glut right now so it's good to take some supply off the market. Hopefully other steelmakers will cut production as well. Then maybe prices could start to recover in 2H19.
Overall, we view the reaction of these steel stocks to bad news as a good sign that much of the bad news may be priced in already. While it's likely premature to call a bottom in these steel names, we think they are worth monitoring as they could make a nice bounce-back move later this year if the steel market improves.