United States Steel (X) revenue for the quarter declined 26% from a year ago period to $3.2 billion, while it reported an adjusted loss of 7 cents a share, which lagged way behind the 27 cents EPS expected by analysts. The results were considerably affected by large amount of cheap steel imports.
But, it is not the only one to lag behind the estimates; in fact some of its peers also reported the same during the earnings season. Such disappointing results sent tremors across the steel industry. The main question is will this affect the long term prospects of the companies or is only a short term factor. Starting with U.S Steel’s numbers, let’s have a detailed analysis.
It is a significant surge and its impact was evident in the first quarter numbers. Apart from this, there were two other major factors that caused this decline, namely lower oil prices and a significant loss on shutdown of its coke making facilities.
Looking ahead
These are tough decisions but it is the right thing to do, and these short term pains would be fruitful once demand starts improving. Though the company is focused on cost cutting initiatives, it is also making the right investment with its Carnegie way transformation that would drive the overall growth in its business.
For example, as a part of this strategy U.S Steel implemented process improvements in the first quarter. This led to increased recovery of off gases in the steel shop, which are reused as fuel for its boiler, resulting in reduced purchase of natural gas and coal coupled with lowered emission of carbon dioxide. The steel maker implemented many such projects under the Carnegie way initiative, leading to total benefits of $340 million for 2015.
While such initiatives will help to improve its bottom line, the company is also positive about growth in its top line. Going forward, U.S Steel anticipates strong performance from the automotive market and the construction segment. According to a recent service center data for flat rolled inventory levels and materials and order levels, the booking rate is expected to improve going forward, which will add to its top line in the days to come.
But the real headwind comes on account of the rising imports from other countries that are flooding the U.S market with their low priced steel. Further adding to this pressure, the decline in crude prices forced the oil companies to reduce their rig count, which consequently lowered the demand from this sector. The decline in orders was observed in both flat rolled and tubular segment and it will take some time for overall steel consumption level to rebalance supply chain inventory levels in both these segments.
Conclusion
All in all, its near term prospects seems to be choppy, but as the demand sets in led by an uptick in crude prices the company is expected to report strong growth. Moreover, its forward P/E looks impressive at 16.44 compared to a trailing P/E of 34.03, which indicates of significant improvement in its earnings in the days ahead. Therefore, in the light of these factors, investment in U.S Steel at current levels could reward handsomely in the coming years.
Source: gurufocus.com
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