19 Sep

US Steel Companies’ Guidance Opens a Can of Worms

WRITTEN BY Mohit Oberoi, CFA

This week, three leading US steel companies provided their third-quarter earnings guidances. All these companies’ guidances were lower than analysts were expecting. To add to the gloom, US steel companies’ commentary on the market outlook has also been somewhat pessimistic.

US steel companies’ third-quarter guidances

Yesterday, U.S. Steel Corporation (X) released its third-quarter earnings guidance. The company expects to post adjusted EBITDA of $115 million. It’s worth noting that this guidance doesn’t include the impact of the Clairton Works fire and the related charges. U.S. Steel expects to post adjusted net EPS of -$0.35 in the third quarter. Its third-quarter guidance is far below what analysts were expecting.

This week, three leading US steel companies have provided their third-quarter earnings guidances. The one common link among US steel companies’ third-quarter guidances is that all of them miss consensus estimates.

US steel companies’ price action

September started on a strong note for US steel stocks. However, a wave of dismal earnings guidance has led to a sell-off this week. U.S. Steel is down 4.9% this week, while AK Steel (AKS) is down 10.0%. Nucor (NUE) and Steel Dynamics (STLD) have lost 1.3% and 3.5%, respectively. Nucor and Steel Dynamics have also issued downbeat third-quarter guidances. AK Steel doesn’t provide quarterly earnings guidance. Earlier this year, it moved to annual guidance. The company issues its quantitative earnings guidance during its earnings calls. U.S. Steel, Nucor, and Steel Dynamics usually provide their quarterly guidances two weeks ahead of a quarter’s end.

US steel companies’ outlooks

When we talk about any company’s earnings or guidance, there’s more than one aspect we need to consider. The first is, of course, the hard numbers. Here, all US steel companies gave issued downbeat third-quarter guidances. However, beyond the hard numbers, we also need to consider their outlooks. For metals and mining companies, it’s equally important to look at management’s comments on the industry. In a commodity industry such as steel, a company’s outlook also hinges on the broader industry environment.

The overall outlook doesn’t look great

Looking at US steel companies’ guidances, we can sense a sort of pessimism. For instance, Nucor talked about softness in some end markets, including the automotive industry. The automotive industry is the second-largest steel consumer. AK Steel gets most of its revenue from automotive customers. Nucor, too, has expanded its automotive shipments.

U.S. Steel’s comments on the US steel industry’s outlook are even more depressing. It said, “The positive flat-rolled steel market indicators experienced earlier this summer have softened after a brief recovery in steel selling prices.” U.S. Steel idled two blast furnaces in the US earlier this year. In its third-quarter guidance release, it said that it expects to keep the two furnaces idled at least until the end of 2019.

US steel industry and plant closures

Last year, U.S. Steel announced the restart of two blast furnaces at its Granite City facility to much fanfare. US President Donald Trump also visited the facility to highlight how his administration’s policies have helped US steel companies. Last month, Trump also said that the US steel industry was “thriving” under his administration.

Europe doesn’t look any better

The steel industry’s woes aren’t limited to the US alone—it’s a global problem. U.S. Steel also has operations in Central Europe. In its third-quarter guidance, it said, “In Europe, market conditions have continued to deteriorate, as the dislocation between steel selling prices and raw material costs continues to result in significant margin compression.” Earlier this year, U.S. Steel also idled a blast furnace in Europe. The company doesn’t expect to restart the blast furnace anytime this year.

U.S. Steel’s Tubular segment

U.S. Steel’s commentary on its Tubular segment was also bearish. It expects the segment to be “under pressure for the remainder of the year as market conditions have turned negative and import levels remain high.” The Tubular segment produces steel products for the energy industry.

Overall, U.S. Steel’s third-quarter guidance was quite bearish, both on earnings and on outlook. Its shares fell sharply in after hours yesterday. As we noted in Thriving US Steel Companies Face Moment of Truth, these third-quarter earnings guidances are a reality check for steel investors. US steel companies’ stock prices rose sharply in the first two weeks of September. Now, as it turns out, investors counted their chickens before they hatched.

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