All posts from Zacks
Zacks in Our Research. Your Success.,

U.S. Steel (X) Preview: Will Imports, Oil Hurt Q1 Earnings?

U.S. Steel X is set to release its first-quarter 2016 results after the bell on Apr 26.

The steel giant swung to a big loss in the fourth quarter of 2015, hit by a hefty tax provision and lower selling prices. However, adjusted loss was much lower than the Zacks Consensus Estimate. Revenues tumbled year over year on lower shipments and pricing, but beat expectations.

U.S. Steel continued to face a difficult steel market environment in the quarter including high levels of low-priced imports that led to lower prices in its Flat-Rolled segment. Its tubular business was also affected by lower energy prices.

U.S. Steel has missed the Zacks Consensus Estimate in 3 of the trailing 4 quarters with an average negative surprise of 54.62%. Let’s see how things are shaping up for this announcement.

Factors to Consider

U.S. Steel, in its fourth-quarter 2015 call, said that it envisions adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA) to be near breakeven for 2016 at the prevailing market conditions (including spot prices and import volumes). The company also sees continued uncertainty across many of its end-markets and expects weaker results across its operating segments in 2016 compared with 2015.

Nevertheless, CEO Mario Longhi said that the company will remain focused on improving its cost structure and is making progress on its Carnegie Way program amid the challenging operating environment.

U.S. Steel is still struggling to cope with an influx of cheap steel imports. High levels of imports are expected to continue to weigh on steel prices in the March quarter.

Imports and oversupply in the industry are pressurizing steel prices, thereby affecting margins of U.S. steel producers. Despite some favorable developments on the import front in the recent past, the U.S. steel industry still remains under the risk of cheaper imports in the face of a stronger dollar.

Unfairly-traded, subsidized imports are still flowing into the American market due to foreign producers’ overcapacity. Finished steel imports captured a record 29% share of the domestic market in 2015.

U.S. Steel is also feeling the bite of depressed crude oil prices, which is affecting its business in the energy market. Lower oil prices have led to reduced drilling activities among energy companies. While oil prices have rebounded from the 13-year low they hit in Feb 2016, prices remain under pressure given persisting high levels of crude oil production in a heavily oversupplied market.

The combined impacts of lower oil prices and imports have forced U.S. Steel to take necessary actions including idling of a number of production facilities, resulting in the layoff of thousands of workers.

Nevertheless, U.S. Steel is seeing strong demand in the automotive space. It is also aggressively pursuing actions to improve its cost structure through its “Carnegie Way” program, which is expected to somewhat mitigate the unfavorable impacts of the headwinds faced by the company.

The Carnegie Way program delivered $815 million of benefits in 2015 and is expected to generate $250 million in benefits in 2016, aided by implementation of a number of projects.

Earnings Whispers

Our proven model does not conclusively show that U.S. Steel will beat earnings estimates this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP for U.S. Steel is -2.33%. This is because the Most Accurate Estimate stands at a loss of $1.32, while the Zacks Consensus Estimate is pegged at a loss of $1.29.

Zacks Rank: U.S. Steel’s Zacks Rank #3 (Hold), when combined with a negative ESP, makes surprise prediction difficult. We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look
Here are some companies in the basic materials sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Coeur Mining, Inc. CDE has an Earnings ESP of +12.50% and a Zacks Rank #2 (Buy).
Steel Dynamics Inc. STLD has an Earnings ESP of +7.90% and a Zacks Rank #3.
TimkenSteel Corp. TMST has an Earnings ESP of +10.81% and a Zacks Rank #3.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
COEUR MINING (CDE): Free Stock Analysis Report
STEEL DYNAMICS (STLD): Free Stock Analysis Report
UTD STATES STL (X): Free Stock Analysis Report
TIMKENSTEEL CP (TMST): Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research