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Why U.S. Steel’s 3Q16 Earnings Miss Is Not a Major Surprise

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U.S. Steel’s 3Q16 earnings miss

As discussed in the previous part, U.S. Steel Corporation’s (X) 3Q16 net profits fell well short of analysts’ expectations. U.S. Steel’s 3Q16 earnings miss triggered a major sell-off, resulting in it closing at $17.82 on November 2, 4.8% lower than its previous day’s closing.

Nucor (NUE) also missed consensus earnings estimates in 3Q16. However, AK Steel (AKS) and Steel Dynamics (STLD) managed to post better-than-expected earnings in the quarter.

There are several metrics that you can use to measure a company’s profitability. While net profit is widely used for analyzing a company’s financial performance, for companies in the commodities space (XME), EBITDA (earnings before interest, tax, depreciation, and amortization) are used.

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EBITDA miss

U.S. Steel generated adjusted EBITDA of $272 million in 3Q16, compared with $134 million in 2Q16 and $85 million in 3Q15. Although U.S. Steel’s 3Q16 EBITDA rose sharply on a yearly and quarterly basis on higher steel prices, they still fell short of analysts’ expectations. According to Bloomberg consensus estimates, analysts expected U.S. Steel (X) to post adjusted EBITDA of $336 million in 3Q16.

In our U.S. Steel 3Q16 pre-earnings analysis, we noted that U.S. Steel’s consensus earnings estimates looked aggressive. We also noted that analysts’ estimates for U.S. Steel’s 4Q16 EBITDA look even more aggressive.

As expected, U.S. Steel lowered its 2016 EBITDA guidance due to the steep decline in flat steel prices. In the next article, we’ll look at how U.S. Steel’s 2016 guidance spooked investors.

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