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U.S. Steel’s Earnings Guidance All Depends on Steel Markets

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U.S. Steel’s EBITDA guidance

As we had discussed in our pre-earnings analysis, U.S. Steel Corporation’s (X) 1Q16 earnings release was going to be more about the 2016 EBITDA[1. earnings before interest, taxes, depreciation, and amortization] guidance than the company’s 1Q16 financial performance. While U.S. Steel missed consensus revenue and earnings estimates, the stock still managed to close flat as the 2016 guidance rose significantly. In this part of the series, we’ll explore what drove U.S. Steel’s 1Q16 EBITDA.

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1Q16 EBITDA

U.S. Steel generated negative adjusted EBITDA of -$107 million in 1Q16. In comparison, the company had posted EBITDA of -$13 million and $110 million in 4Q15 and 1Q15, respectively. Looking at the sequential quarterly performance, we see that the Tubular segment’s 1Q16 EBITDA was similar to 4Q15 while U.S. Steel Europe’s EBITDA fell to $5 million in 1Q16 from $26 million in 4Q15.

However, the company’s Flat-Rolled segment generated negative EBITDA of -$97 million in 1Q16 versus near-breakeven EBITDA in the previous quarter. The segment’s EBITDA mainly fell due to the reset of contracts at the beginning of the year. While spot steel priced have improved toward the end of 1Q16, pricing was quite depressed toward the beginning of the quarter.

Other steel companies that have reported earnings so far—including Steel Dynamics (STLD), Nucor (NUE), and AK Steel (AKS)—have also seen declines in average selling prices due to contract resets. We could see the impact of lower contract prices on ArcelorMittal’s (MT) 1Q16 earnings as well.

Guidance

U.S. Steel expects to generate EBITDA of $400 million in 2016 based on the current market scenario. This forecast is significantly above the consensus EBITDA estimates of $211 million. Having said that, markets (DIA) were already pricing these numbers into U.S. Steel’s stock price.

There are both upside and downside risks to U.S. Steel’s EBITDA guidance, which we’ll explore in the next part of this series.

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