What Is Driving U.S. Steel’s Recent Price Volatility?

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X: United States Steel logo
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United States Steel

U.S. Steel (NYSE: X) has experienced a great degree of volatility in its stock price since the company released its first-quarter earnings. Volatility is largely being driven by the uncertainty revolving around the potential benefit that the company will be able to realize with the implementation of the latest U.S. steel tariffs and the company’s ability to comprehend the benefits of its $2 billion asset revitalization program. In this note, we elaborate the key risks involved in the valuation of U.S. Steel which has been negatively impacting the company’s stock price.

Uncertainty With Respect To The Potential Benefit Of The Imposed U.S. Steel Tariffs

U.S. steel stocks surged post the imposition of 25% punitive tariffs on steel imports in the U.S. with an expected positive impact on the U.S. steel industry as a whole. However, President Trump has been discussing negotiations with various countries with respect to exemptions from the recently imposed duties. This is leading to a great deal of uncertainty regarding the actual benefit that will be realized by steel stocks as a consequence of the imposed tariffs.

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U.S. Steel’s stock has been gaining strength since December 2017 in an optimistic anticipation of tariff imposition as assured by President Trump to protect the domestic steel industry. However, an unclear direction of the impact of these tariffs has led to the recent volatility in the company’s stock price.

Increased Apprehension Regarding The Benefits Of The Asset Revitalization Program

U.S. Steel’s stock price has been underperforming in comparison to its peers since 2017 despite a favorable market environment for steel in the U.S.  This was mainly as a result of the company’s $2 billion (approx 1.5 billion in Capex) asset revitalization program announced in 2016. The asset revitalization program is a comprehensive investment program aimed at improving the company’s efficiency, product quality, and lower its production costs. However, the implementation of this program is expected to result in planned production outages in its U.S. Flat-Rolled division which has been negatively weighing down the company’s stock price. U.S. Steel’s U.S. Flat-Rolled division experienced a volume shipment decline of almost 2% in 2017 and is expected to reduce output in a phased manner through 2020. This has remained a significant low for the company since both the demand and the price for steel in the U.S. is expected to increase as a direct consequence of the latest tariffs imposed.

Additionally, even though the asset revitalization program is expected to provide material benefit to the company in the future years, a considerable amount of risks exists in case the company is unable to realize these benefits with the significant amount of capital expenditure involved. Recently, the company guided towards a $30 million negative impact on EBITDA in Q2 2018 as a result of “operational challenges” at its steelmaking facility in the Great Lakes region which is contrary to the expected impact of its revitalization program. Such developments might question the company’s route towards revitalization.

Thus, investors have become increasingly unsure of the company’s performance in the upcoming quarters which has led to the recent volatility in the company’s stock price. For the time being, however, investors have reinstated their confidence in the company’s stock, nevertheless, any unexpected development might result in a significant move in the company’s stock price in the near term.

Our 2018 outlook for the company has been outlined in our interactive dashboard. In case you do not agree with our assumptions, you can make changes to them in our dashboard analysis to come up with your own projections.

 

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