US Steel (X), a major producer of steel in the US and Europe, is trading sharply lower today (-24%) after reporting Q1 results last night.
In case you're not familiar, US Steel is an integrated steel producer of flat-rolled (primarily used in automotive/appliances) and tubular (primarily used for oil pipelines) steel products with major production operations in North America and Europe. Unlike a mini-mill, like Nucor (NUE) and Steel Dynamics (STLD), which makes new steel by melting scrap steel in an electric arc furnace (EAF), an integrated producer makes steel from raw materials (iron ore and coke) using what's called a blast furnace.
Turning to the Q1 results, adjusted EPS came in at a $(0.83) loss, which was better than the $(2.15) loss reported in the prior year period, but it was well below market expectations as a profit was expected. Revenue rose 16.4% year/year to $2.73 bln, but this also was below expectations.
Adjusted EBITDA is always a key metric for US Steel and that improved to $74 mln in Q1, up from a $(107) loss in the prior year period, but it was below the $211 mln result in Q4. In terms of guidance, US Steel expects 2017 EPS to come in around $1.50, which is well below the $3.08 guidance provided in January. Adjusted EBITDA guidance for 2017 was cut to $1.1 bln from $1.3 bln in January. That is still up a lot from the $510 mln result in 2016 but that is still a fairly sizeable cut.
On the call this morning, analysts seemed to be quite disappointed, especially in the lowered adjusted EBITDA guidance. Analysts seemed puzzled that X would be lowering guidance so severely at a time when the steel industry is doing pretty well. The main reason for the decline seems to be that X has accelerated some investments in improving and maintaining some steelmaking assets. This has led to outages, downtimes and production curtailments.
X says it's taking the long view, that making these investments now is the prudent thing to do as X expects current market conditions to remain strong. Making these improvements will help them later and it will position X better during the next downturn. On the call, X said 2017 is a year of investment in cap-ex as the company plans to take more downtime. X says it will give up some spot market sales and that it needs to do these improvements now and strike while the iron is hot as it will position X better for the long term.
The company says it has built up its balance sheet, so now is the time to make these investments. X is comfortable that it has what it needs, it should not need to raise capital in the public markets to pay for these investments. X also noted that as you open a hot strip mill, you find other things that can be improved, that is why X decided to accelerate investments.
In sum, clearly investors are not happy with the Q1 results and 2017 guidance. Analysts seem to have been caught off guard about the magnitude of these maintenance and upgrade investments. With the steel market improving, you have to wonder if this is really the best time to be making these sort of investments. The stock price seems to indicate that the market does not agree with US Steel's decision.