US Steel (X 21.29,-0.93, -4.19%) is trading lower today despite what the headline
suggest would be a roughly in-line quarter Non-GAAP EPS in Q4 more than doubled
yr/yr to $1.82 while revenue rose 17.8% yr/yr to $3.69 bln. Both results were
generally in-line with market expectations although revenue was more on the
So why is the stock lower? It's mostly due to adjusted EBITDA, which is a closely followed metric among investors. Adjusted EBITDA (sort of a rough proxy for operating cash flow) for Q4 rose 66% yr/yr to $535 mln, but that was a good bit below prior guidance of $575 mln. The Q1 guidance was quite weak at just $225 mln, which was well below market expectations.
Several questions during the Q&A on the call this morning centered on the EBITDA guidance for Q1. X responded that, in 2019, Europe is under a lot of pressure, the region is seeing a lot of margin compression. The problem is similar to what the steel industry went through in the US related to trade/imports, that's now happening in Europe, which is seeing higher imports. Europe needs to figure out how to remedy this. Europe saw pressure come in late 2018 and it's bigger than X thought it would be.
It's not just problems with Europe. There is also some energy cost inflation and X is paying higher prices for coal. FX is also providing a headwind. On the flat-rolled side, the significant drop in flat-rolled pricing is affecting volume. X also expects higher outages in Q1 due to asset revitalization plans. Also, mining is a $30 mln headwind. Overall, X is seeing pressure in a lot of places in Q1 relative to Q4. On the positive side, tubular prices are improving from Q4. Also, keep in mind Q1 is sort of the low bar for the year; X expects 2019 to be good overall.
Furthermore, X expects no pullback on the section 232 trade relief. The company has a high degree of confidence that Sec 232 will not be pulled back. President Trump is highly supportive. Also, X recently announced a $40 per ton price increase on flat-rolled steel. X says it's too soon to tell how the market will react, but X plans to collect that $40 per ton, not entirely sure how quickly X will collect.
In sum, our take on the conference call is that analysts are spooked and disappointed in the Q1 EBITDA guidance. US Steel's response is two-fold: the company is currently facing headwinds, especially in Europe where there is margin compression. Also, there is also lower volume in the US due to outages and there is definitely pricing pressure.
On the other hand, X was reminding investors to relax a bit. Q1 is a seasonally slow quarter. X is still expecting a strong 2019 overall. Fundamental demand signals remain positive. Automotive sales finished 2018 at above 17 mln units, 2019 should be another good year for autos. Energy markets continue to perform well as many new projects are in the bidding process. Granted, construction has been choppier, but while construction could be slow in Q1 due to winter weather, it should pick up after that. X expects slight growth in steel consumption in 2019 and it expects imports to decline in 2019. Overall, the message is that Q1 should be rough but there should be improvement starting in Q2.
Also, the stock had run from around $17 in late December to close yesterday at $22.22. That's a 30% move in a month, so perhaps expectations were running pretty high heading into this report, which likely explains some of the fall as well.
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