U.S. Steel Is Cheap But Weak Environment Will Hurt Earnings

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U.S. Steel

U.S. Steel (NYSE:X) will announce its second quarter earnings on Tuesday, July 31, and we expect that it will post a decline in revenues as well as operating income mainly due to lower steel prices. Improving steel demand from the U.S. flat rolled and U.S. tubular divisions, however, should offset the decline in European shipments due to the continuous slowdown in demand. We expect EBITDA margins to take a hit on lower realized prices.

See Full Analysis of U.S. Steel Here

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We expect average realized prices to decline across the segments as steel prices are hovering at a two-year low on London Metal Exchange (LME). The resurgence of the European debt crisis, slowing Chinese growth and mixed reports about the U.S. economy, have contributed to the decline in steel prices on LME.

Based on data available from LME, the average steel price for the period April-June 2012 was close to $400 per ton compared with $550 per ton for the April-June 2011 period. [1]

The company’s North American shipments are likely to remain flat or marginally higher. Rising automotive sales figures should translate into a higher number of shipments even as demand from construction and infrastructure remain weak. The company should also benefit from demand from energy companies as they continue to expand their natural gas and petroleum pipeline networks to meet rising demand and reduce operational and transportation costs.

On the other hand, European shipments will continue to decline as the Eurozone is still reeling with overcapacity in the industry. We expect the company’s margins to decline mainly on pricing concerns even as the recent cost-cutting measures could lend a little support. Further, the company is looking at all-time low natural gas prices to help boost its margins.

We have a $33 price estimate for U.S. Steel, about 75% ahead of the current market price. We will revise our model to reflect weak steel prices and other developments post the earnings announcement.

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  1. Steel Billet Prices, LME, July 23 2012 []