Yesterday when commenting on the abysmal results and even worse guidance by steel giant US steel, which cut its 2017 guidance by more than half, now expecting 2017 net earnings of approximately $260 million, or $1.50 per share, more than 50% below the prior forecast of $3.08, we asked “if X cuts EPS by 50% in “improving” market conditions, one wonders what EPS would look like if conditions were actually worse.”
This morning, with X plunging 18% in pre-market trading as Wall Street struggled to understand the reasons behind its earnings miss and guidance cut, the sellside is out, screaming for blood. While some analysts said the steelmaker may be facing company-specific issues, the results also dragged down competitors including ArcelorMittal and Nucor. Axiom’s Gordon Johnson, who has the only sell rating on the stock, said the company has worse to come.
Below, courtesy of Bloomberg is a summary of the reactions to US Steel’s numbers, which if nothing else, will likely prompt Trump to be even more aggressive in seeking trade remedies from China which over the past two years has been dumping its own steel on the US market with gusto.
U.S. HRC Spot Price vs. Chinese HRC Spot Price – U.S. Premium = $244 (courtesy of Axiom)
AXIOM (Gordon Johnson)
- If things are so bad during good times, 2Q-4Q is set to resemble a “Nightmare on Elm Street”
- Applying market’s 2017 4x Ebitda multiple implies a fair value of $21/share for X
- Next move in U.S. steel industry fundamentals is lower, given scrap prices now in full-on correction mode, negative seasonality around the corner for U.S. steel mills, iron ore price declines, rising steel imports and correction in coking coal prices
- Reiterates sell
JEFFERIES (Seth Rosenfeld)
- Operational issues and a myriad of other headwinds pressured flat rolled results which drove the “abysmal results”
- Management’s asset revitalization plans may be the best long-term strategy, but disruption caused by these efforts will ultimately cap X’s ability to participate in currently favorable markets
- X’s post-market trading on April 25 implied shares were trading at ~4.9x X’s revised $1.1b Ebitda guidance, or just below $26/share, which is slightly above Jefferies $25/share downside scenario
MORGAN STANLEY (Evan Kurtz)
- Reasons behind guidance cut are unclear
- Would think that faster asset revitalization program should lead to increased spending, but that’s not the case; will be looking for the company to provide more clarity on this issue
- Struggling to understand how costs moved up so much in 1Q
BMO (David Gagliano)
- All of X’s shortfall was in core U.S. flat-rolled segment results
- $1.1b of Ebitda implies $24-$30 share price, assuming 4.5x-5.5x Ebitda
- The magnitude of the miss once again highlights underlying unprecedented earnings volatility for the company, even when compared with its high-beta steel making peers
KEYBANC (Phil Gibbs)
- Expect meaningful weakness in shares today
- On an apples-to-apples basis, guidance cut includes positive reclassification of $175m in cost and $160m of incremental Carnegie Way savings, making “true apples-to-apples” mark- to-market 2017 Ebitda guidance cut to be ~29% to $925m vs reported $1.1b
MACQUARIE (Aldo Mazzaferro)
- Magnitude of year EPS guidance cut is even larger than first apparent; new guidance of $1.50 includes previously outlined $0.60 gain from lower operating expenses, due to new accounting policy, thus adj. EPS guidance would actually be 90c
- Given recent report and revised guidance, remain concerned that X’s high-fixed costs, amplified by weak volumes and pricing, will continue to keep earnings under pressure
Source: Bloomberg
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