Strong End Market Demand In The U.S. And Deleveraging Helps US Steel Beat Consensus In Q1 2019

-11.73%
Downside
40.78
Market
36.00
Trefis
X: United States Steel logo
X
United States Steel

United States Steel Corp (NYSE: X) released its Q1 2019 results on May 02, 2019. The company beat market expectations for revenue as well as earnings. US Steel Corp reported total revenue of $3.5 billion in Q1 2019, marking y-o-y growth of 11.1%. Higher revenue was driven by growth in the company’s flat-rolled and Tubular segments, due to strong end market demand, along with higher oil prices, which drive revenue from the Tubular segment. Adjusted earnings came in at $0.47 per share, higher than $0.32/share in the year-ago period. Higher earnings were mainly a reflection of higher revenue and decrease in interest cost on the back of early debt repayment.

We have summarized the key announcements in our interactive dashboard – How did US Steel Corp fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Materials data.

Relevant Articles
  1. Can U.S. Steel Stock Return To Pre-Inflation Shock Highs?
  2. What’s Happening With U.S. Steel Stock?
  3. Will U.S. Steel Stock Continue To Outperform Despite Economic Headwinds?
  4. Is U.S. Steel Set For Tough Q3 Results?
  5. Why We Are Cutting Our Price Estimate For U.S. Steel Stock
  6. How Will U.S. Steel Stock Fare In An Uncertain Economy?

A Quick Look at US Steel’s Revenue Sources

US Steel reported $14.2 billion in total revenues in FY 2018. This included 4 revenue streams:

  • US Flat Rolled: $9.7 billion in FY 2018 (68.3% of total revenues). This includes sale of hot rolled sheets, cold rolled sheets, coated sheets, semi-finished bars and plates, and tin-mill products, made by rolling processes.
  • European Tubular and Flat Rolled: $3.2 billion in FY 2018 (22.6% of total revenue). This includes steel sheets and plates as well as tubular items like pipes that are made by rolling processes and are sold in the European markets.
  • US Tubular: $1.2 billion in FY 2018 (8.7% of total revenue). This includes sale of steel pipes made using flat-rolled steel.
  • Other Business: $61 million in FY 2018 (0.4% of total revenue). This includes transportation services (railroad and barge operations) and real estate operations.

Key Takeaways

A] Revenue Trend

US Flat Rolled

  • Segment revenue increased by 17.4% to $2.4 billion in Q1 2019 from the year-ago period.
  • Higher revenue was driven by 7.5% increase in shipments, led by robust end market demand, such as automotive, industrial equipment, construction, and pipe and tube.
  • However, on a sequential basis, flat-rolled revenue declined due to lower price realization, driven by higher supply, with China’s winter cuts being less severe than the previous year, which led to decline in the global steel price level.

US Tubular

  • Revenue from the segment steadily increased over the last couple of quarters, driven by increase in shipments and higher oil prices, as this segment is directly related to oil markets.
  • Segment revenue increased by about 30% (y-o-y) in Q1 2019, driven by strong demand conditions and oil prices remaining at an elevated level.

European Tubular and Flat Rolled

  • Revenue from the segment declined by over 10% (y-o-y) in Q1 2019, mainly driven by declining EU car production and lower overall demand condition in the region.
  • Stronger dollar also had an adverse impact on revenue.
  • Revenue from the segment is expected to remain subdued due to uncertainty around economic growth in European region.

B] Expense Trend

Total expenses have increased due to higher cost of sales and increase in the effective tax rate, partially offset by lower interest burden.

  • COGS as % of Revenue: Cost of sales as a % of revenue increased in Q1 2019 from the year ago level, primarily driven by significant temporary idling charges, restart and related costs associated with Granite City Works, and expenses related to Clairton coke making facility fire.
  • Interest Expense: Interest expense has been decreasing due to early debt repayment by the company. Additionally, in December 2018, the company redeemed all of its outstanding Senior Notes due 2020 ($356 million aggregate principal amount), which led to further decline in interest expense in Q1 2019.
  • Effective Tax Rate: Effective tax rate increased to 12.9% in Q1 2019, driven by the absence of any tax benefits received by the company during the quarter, unlike in 2018.

Net income margin has been increasing steadily through 2018, with a sharp increase in Q4 2018 due to lower interest expense and tax benefits received. Margins dropped sharply on a sequential basis in Q1 2019, due to increase in total expenses driven by higher tax and cost of sales. However, compared to Q1 2018, higher revenue translated into higher net income margin in Q1 2019.

Full Year Outlook

  • Total revenue for the year is expected to decline by 1.5% to $13.97 billion in 2019 from $14.18 billion in 2018, on the back of loss of volume from ongoing repair works at Great Lakes Works facility and under-performance of the European segment. This is likely to be exacerbated by subdued pricing environment.
  • After net income margin increased sharply to 7.9% in 2018, margins are expected to decline to about 6.8% in 2019 in the absence of large tax benefits, unlike 2018.
  • However, margins would still be higher than 2016 and 2017, primarily driven by lower interest expense following early debt repayment, coupled with benefits from lower costs and increased productivity from the $2 billion asset revitalization program.

Trefis has a price estimate of $23 per share for US Steel’s stock. The company’s stock price declined following the company’s announcement of it planning to spend $1.2 billion to construct new plants in Pennsylvania. However, we believe that the additional investment along with the existing asset revitalization program would help speed up production and increase profitability in the medium term, thus supporting growth in the stock price.

 

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Data

Like our charts? Explore example interactive dashboards and create your own.