US Steel Q3 2017 Earnings Review: Operational Efficiency Drives Earnings

-11.73%
Downside
40.78
Market
36.00
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United States Steel

U.S. Steel (NYSE:X) reported better than expected results by beating market estimates by $0.22. Strong results were achieved through higher operational efficiency coupled with favorable market conditions.

Although the company reported an increase in revenue by 21%, operational efficiency increased the company’s EBITDA margin by 26% as compared to Q3 2016. Operational expenses were 92% of net sales as compared to 95% a year ago. The improved efficiency is derived from the success of the ongoing asset revitalization program initiated by the company, the full benefit of which would be reaped from 2020 onward.

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The U.S Flat Rolled segment displayed stagnation this quarter due to the under-utilization of capacity experienced as a result of the ongoing asset revitalization program in the flat rolled operation.

The European division saw a decline in volume due to high raw material prices, particularly of iron ore and coal. Higher average price realization from the European division was particularly due to external factors including the strengthening of the euro against the U.S dollar.

The Tubular division, on the other hand, displayed a remarkable performance this quarter owing to the recovery of the global energy sector. Oil prices have gained roughly 15% since the Organization of Petroleum Exporting Countries (OPEC) decided to cut crude output by 0.8 million barrels per day from January ’17. This accounts for approximately a 2% reduction of global oil supply. [1] The fall in global oil output has helped reduce the prevalent supply surplus and has put a pressure on price as demand remains intact. U.S. Steel realized 80% shipment recovery in its Tubular segment after subsequent quarters of under performance.

U.S. Steel aims to maintain a stable and predictable growth in its productivity through increased operational efficiency in the upcoming years. The pending outcome of the Section 232 investigation due in Jan ’18 would have a significant impact on the company’s future operations. We would be keeping a close watch as these developments unfold.

We have $25 price estimate for U.S. Steel which is 8% below the current market price.

Have more questions about U.S. Steel? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for U.S. Steel

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Notes:
  1. Opec cuts help push oil prices to 2-year highs, Financial Times []