U.S. Steel Corporation Is Playing Offense: Should It Be?


Aug. 5 2019, Updated 11:01 a.m. ET

  • U.S. Steel Corporation released its second-quarter earnings results last week.
  • Though its earnings were better than expected, it saw a selling spree after its earnings release.
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U.S. Steel’s second-quarter earnings

U.S. Steel Corporation (X) released its second-quarter earnings results last week. The company posted better-than-expected revenue and profits. Its second-quarter earnings also exceeded its guidance. Generally, one would expect markets to react positively to a company’s earnings beat. However, this wasn’t the case with U.S. Steel. The stock was down 8.6% on August 2. It’s now down 26.8% for the year.

What’s behind U.S. Steel’s sell-off?

The broader markets sold off on August 2 after President Donald Trump’s fresh tariff salvo. AK Steel (AKS), Nucor (NUE), Steel Dynamics (STLD), and ArcelorMittal also closed with falls of 1.4%, 0.92%, 2.2%, and 3.9%, respectively. While other steel stocks were also down, U.S. Steel saw a massive selling spree. It would be fair to say the markets didn’t like U.S. Steel’s second-quarter performance and outlook. In our view, U.S. Steel’s second-quarter earnings look reasonably good considering its macro headwinds. However, its management’s comments on capex might have spooked investors.

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U.S. Steel’s second-quarter earnings conference call

During U.S. Steel’s second-quarter earnings call, CEO David Burritt admitted, “The market has been challenging over the past few months.” However, he added, “We are playing offense, and we are stronger, more competitive.” In May, before its first-quarter earnings release, U.S. Steel outlined a mega capex plan. The outline was in addition to the company’s ongoing asset revitalization plan. U.S. Steel saw a selling spree after it announced a new round of investments in May.

Show me the cash

According to U.S. Steel, these investments will help structurally increase its run rate EBITDA. While the investments may lift U.S. Steel’s earning capacity, they’re currently leading to cash burn. U.S. Steel also posted negative free cash flows in the second quarter. While U.S. Steel didn’t comment on its future cash flows, it’s expected to post negative free cash flows between 2019 and 2021.

Markets have been particularly concerned about U.S. Steel’s expected cash burn. The company would need to raise capital to fund its aggressive investment plans. During its second-quarter earnings release, U.S. Steel talked about the funding mechanism for its capex plans. U.S. Steel plans to raise $300 million each from environmental revenue bonds and vendor-supported financing. The company will look to its revolver facility in Europe to raise another $280 million. U.S. Steel will also consider upsizing its borrowing facility in the US. The company also talked about exploring the high-yield market. It expects its blended coupon to be close to 6% for the additional borrowings.

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Should U.S. Steel be playing offense?

These investments are probably warranted considering U.S. Steel’s aging plans. The company likely underspent on its plants due to its Carnegie Way program. It expects massive EBITDA run-rate benefits once these ongoing capex programs are complete. However, U.S. Steel is making these investments at a time when global steel markets are in a slowdown. U.S. Steel doesn’t have the privilege of balance sheet strength like Nucor and Steel Dynamics. Along with these capex plans, U.S. Steel is also repurchasing shares. While its low stock price makes buybacks attractive, the company also needs to look at its cash burn. The company is playing offense. Uncertainty in steel markets would warrant a somewhat defensive approach.

Trump’s trade war

President Trump recently announced tariffs on another $300 billion worth of Chinese goods. The escalation in the US-China trade war has thwarted steel stocks’ recoveries. Steel stocks fell to their 52-week lows in May amid falling steel prices and escalation in the US-China trade war. US steel prices have seen some traction over the last month. However, the escalation in the US-China trade war could negatively affect the nascent recovery in US steel prices.


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