Key Takeaways From U.S. Steel’s Q4 2018 Results

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United States Steel

U.S. Steel (NYSE: X) released its Q4 2018 earnings results on January 30, 2019, followed by a conference call with analysts on January 31, 2019. The company fell short of analysts’ expectations for revenue as well as earnings, primarily due to much lower than expected growth in the European flat-rolled and tubular segment on the back of a decrease in shipments and increased costs per ton. U.S. Steel reported revenue of $3.69 billion for the fourth quarter of 2018, which marks a growth of 17.8% on a year-on-year basis. Adjusted net earnings per share saw a sharp increase to $1.82 in Q4 2018, from $0.76 in Q4 2017.

The major takeaways from the announcement have been illustrated in the graphs using our interactive dashboard – U.S. Steel’s Q4 2018 Financial Performance.

 

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Key Factors Affecting U.S. Steel’s Q4 Results

  • Stable Growth in US Flat-Rolled Segment: US Flat-rolled products is the most valuable and stable segment for US Steel, with 68% of the company’s revenue for 2018 being contributed by this segment. Shipments have seen a steady increase through all the quarters of the year, primarily driven by robust demand from end-market such as automotive, industrial equipment, construction, and pipe and tube. This was slightly offset by domestic mill shipments to the tin plate segment being flat in Q4 2018 over the previous year period. As China’s winter cuts were less severe than last year’s, global steel prices declined in Q4, which hit the segment revenue growth for the quarter. The Flat-rolled products segment reaped benefits from the ongoing $2 billion asset revitalization program which helped in reducing the cost per ton by 5.1% sequentially in Q4 2018, thus increasing profits in spite of a fall in prices.

  • Higher shipments in the Tubular segment: The US Tubular segment saw shipments grow by over 20.7% (y-o-y growth) in Q4 2018. Sequentially, volume grew by about 17.4% during the last quarter. As the performance of this segment is directly related to the oil market, shipments grew as the oil rig count increased by 2% and gas rigs went up by 4% during Q4, thus increasing demand. Price realization under the segment decreased as oil prices saw some decline in the latter half of 2018, with the WTI oil price of $59 during Q4, which was 16% lower compared to Q3. The average realized price dropped by 7.1% from Q3 2018. However, this was completely offset by increased shipments. The company’s cost optimization steps led to a sequential decrease of cost per ton by 4% in Q4, which led to rise in segment EBITDA.

  • Poor performance by the European segment: US Steel’s European segment proved to be a drag on its financial performance during the quarter. Decreasing economic fundamentals and uncertainty around economic growth in the region led to a decrease in demand. Product shipments were 2.5% lower compared to Q3, however, on a year-on-year basis, shipments decreased by 14.3% in Q4. Additionally, a stronger dollar also had an adverse impact on demand in Europe. Though there was a marginal increase in price, lower than expected volume and increased cost led to a whopping 35% y-o-y drop in segment EBITDA during Q4 2018.

For the full year, US Steel’s revenue increased by 15.7% to $14.2 billion, from $12.3 billion in 2017, benefiting from increased shipments under flat-rolled and tubular segments, partly offset by lower volume in the European operations. The pricing environment was favorable during the year due to robust demand from the end-markets and the imposition of import tariffs in the US. The company’s cost reduction led to a significant increase in the net earnings per share to $5.36 in 2018 from $1.94 in the previous year.

What is in store for 2019?

Going forward, we expect US Steel to face rising costs and lower shipments in its European segment in 2019. US Tubular and flat-rolled divisions are expected to continue seeing healthy growth on the back of rising volume and favorable pricing environment. The company’s net income margin increased from 3.2% to 7.9% in 2018, benefiting from lower costs and increased productivity from the $2 billion asset revitalization program. Additionally, in December 2018, the company redeemed all of its outstanding Senior Notes due 2020 ($356 million aggregate principal amount). This is expected to be reflected in lower interest expense and finance costs for 2019, thus translating into a high margin of about 8%.

 

We have a $31 price estimate for U.S. Steel’s stock, which is currently higher than its market price.

 

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