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U.S. Steel’s Q2 Earnings Beat: Is It Impressive?

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Aug. 2 2019, Published 7:32 a.m. ET

On Thursday, U.S. Steel released its second-quarter earnings after the markets closed. U.S. Steel’s Q2 earnings beat the estimates.

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U.S. Steel’s Q2 earnings beat

U.S. Steel (X) released its second-quarter earnings after the markets closed. The company posted an adjusted EPS of $0.45 in the second quarter. The analysts polled by Thomson Reuters expected U.S. Steel to post an adjusted EPS of $0.39 in the second quarter. The company’s second-quarter earnings beat the estimates and its guidance. U.S. Steel had a second-quarter EPS guidance of $0.40. The company posted an adjusted EPS of $0.47 in the first quarter and $1.46 in the second quarter of 2018. While U.S. Steel’s second-quarter earnings beat the estimates, they fell on a yearly and sequential basis. The company’s second-quarter earnings were at the lowest level since the first quarter of 2018.

Drilling deeper into U.S. Steel’s Q2 earnings beat

U.S. Steel generated revenues of $3.54 billion in the second quarter. In comparison, the company posted revenues of $3.50 billion in the first quarter and $3.61 billion in the second quarter of 2018. U.S. Steel’s second-quarter revenues were better-than-expected. In the company’s second-quarter pre-earnings analysis, we noted that its second-quarter revenue estimates looked aggressive.

Our assumption was based on U.S. Steel’s shipments guidance in conjunction with the deteriorating steel pricing environment. However, the company’s shipments were higher than the guidance. David B. Burritt, U.S. Steel’s CEO, said, “We overcame logistics headwinds from severe weather and delivered for our customers, exceeding even our own expectations.”

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Operating metrics

While U.S. Steel’s Q2 earnings beat the estimates, we also need to look at some of the other operating metrics. U.S. Steel shipped 4.0 million tons of steel in the second quarter. In comparison, its steel shipments totaled 3.99 million tons in the first quarter and 3.94 million tons in the second quarter of 2018. While U.S. Steel’s Europe and Tubular segments posted a yearly fall in shipments, they were compensated by higher flat-rolled shipments.

Steel prices

In line with falling steel prices, U.S. Steel reported lower average selling prices across all three of its business segments. Nucor (NUE) and Steel Dynamics (STLD) also reported a sharp fall in their second-quarter average selling prices. However, AK Steel (AKS) dodged the bullet due to the higher proportion of contract sales. Nucor and Steel Dynamics missed their second-quarter earnings estimates. However, AK Steel’s Q2 earnings beat the expectations.

Meanwhile, US steel prices have recovered some of their lost ground after prices fell to multi-month lows in June. US steel companies have announced three rounds of price hikes over the last two months. The price hikes helped build some momentum in US steel prices.

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Capital returns

U.S. Steel returned $37 million to shareholders in the second quarter. The returns include dividends and $28 million towards share buybacks. The company announced a share buyback last year. The stock fell in the second quarter. So, the share buyback would have enabled the company to buy back its shares at a low price. However, U.S. Steel is spending money on repurchases. The markets are concerned about the company’s free cash flow outlook. U.S. Steel has invested heavily to modernize its plants. The higher capex is taking a toll on U.S. Steel’s cash flows. The company posted negative free cash flows in the second quarter as well.

Our views on U.S. Steel’s Q2 earnings beat

A better-than-expected performance on shipments might have driven U.S. Steel’s second-quarter earnings beat. The company’s average selling price progression also looks encouraging considering the fall in spot steel prices. U.S. Steel’s second-quarter earnings call is scheduled for Friday. Management might offer more insights into the company’s ongoing capex plans during the earnings call. U.S. Steel might also discuss the fall in tubular shipments. The segment supplies to the energy sector.

Outlook

While U.S. Steel’s second-quarter earnings beat looks impressive, the escalation in the US-China trade war could dampen the sentiments. On Thursday, President Trump announced another 10% tariff on $300 billion worth of Chinese goods. The deterioration in the macro environment might deter more hikes in US steel prices. Notably, US steel prices rose to a decade high last year. However, US steel prices started to fall in the second half of 2018. The fall in US steel prices was aggravated in the first half of 2019. Since June, we’ve seen some strength in US steel prices.

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