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Why Analysts Think Steel Companies’ Profits Could Rise in 2Q16

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Steel companies’ profits

There are several metrics by which you can measure the profitability of a company. However, for companies in the commodity (DJP) space, EBITDA (earnings before interest, tax, depreciation, and amortization) is generally used.

In the previous part of the series, we looked at steel companies’ 1Q16 EBITDA. Now, let’s explore what analysts are projecting for 2Q16.

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EBITDA expected to rise

Analysts expect steel companies to report higher EBITDA in 2Q16. The biggest rise is expected for U.S. Steel Corporation (X), which is expected to post EBITDA of $103 million in 2Q16 compared to EBITDA of -$107 million in 1Q16.

Along with spot sales, some of U.S. Steel’s contract sales will also benefit from higher spot prices. 23% of U.S. Steel’s flat-rolled shipments have a quarterly reset, while 13% have a monthly reset. As these sales are reset to higher prices, U.S. Steel’s EBITDA could improve significantly in 2Q16 and beyond.

Nucor (NUE) and Steel Dynamics (STLD) are also expected to post higher EBITDA in 2Q16. As discussed previously, these companies have increased their spot exposures and could benefit from higher spot steel prices.

Contract prices

Companies such as ArcelorMittal (MT) and AK Steel (AKS), which have already rolled over some of their automotive contracts, will not reap the full benefits of higher spot prices. AK Steel’s 2Q16 EBITDA will also be negatively impacted by higher raw material costs.

During its 1Q16 earnings conference call, AK Steel didn’t provide a watertight figure, but it expects an LIFO (last in, first out) charge in 2Q16. According to the company, this charge should be less than $10 million.

Along with the EBITDA, investors should also follow the progression in companies’ free cash flows. Read on to the next part of the series to find out which steel companies burnt cash in 1Q16.

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