Will Lower Steel Prices Hurt U.S. Steel's (X) Earnings In Q2?

United States Steel Corporation (NYSE:X) is scheduled to come up with its second-quarter 2019 results after the bell on Aug 1. The steel maker will likely face some pressure on shipment volumes in its Flat-Rolled unit in the quarter. Moreover, weaker U.S. steel prices and soft end market demand are expected to hurt its results.

Shares of U.S. Steel are down around 16.7% year to date, underperforming the industry’s decline of roughly 1%.

Let’s see how things are shaping up for this announcement.

What do the Estimates Say?

The Zacks Consensus Estimate for revenues for U.S. Steel for the second quarter is $3,373 million, reflecting an expected decline of roughly 6.5% on a year over year basis and a 3.6% decrease sequentially.

Shipments for the company’s Flat-Rolled segment are projected to see a 1.8% decrease on a sequential comparison basis as the Zacks Consensus Estimate for the second quarter is pegged at 2,675,000 tons. For the Tubular segment, shipments are expected to rise 3.9% sequentially, as the Zacks Consensus Estimate is 215,000 tons. The same for the U.S. Steel Europe (USSE) unit is expected to fall 6% sequentially as the Zacks Consensus Estimate is 1,000,000 tons.

Moreover, the Zacks Consensus Estimate for average realized price for the Flat-Rolled unit for the second quarter is pegged at $768 per net ton, which indicates an expected 3.8% decline from the sequentially prior quarter.

Average realized price for the Tubular segment is expected to decline around 1.8% sequentially as the Zacks Consensus Estimate for the second quarter is $1,521 per net ton. The same for the USSE unit is expected to fall 2.8% sequentially as the Zacks Consensus Estimate is $651 per net ton.

Factors at Play

U.S. Steel, last month, said that it expects adjusted earnings per share to be roughly 40 cents for the second quarter. The projected earnings reflect a decrease from 47 cents per share recorded in the previous quarter and $1.46 per share the company earned a year ago.

U.S. Steel envisions adjusted EBITDA for the second quarter to be roughly $250 million. The projected figure excludes roughly $15 million of estimated impacts from the fire at the company’s Clairton coke making facility in December 2018.

The company said that its Flat-Rolled segment is being hurt by lower steel prices and weakening end market demand. However, it expects adjusted EBITDA for the unit to be higher on a sequential comparison basis in the second quarter. Flooding in the southern United States led to lower-than-expected shipments in the second quarter, U.S. Steel noted.

Moreover, the company sees sequentially lower adjusted EBITDA for both its USSE and Tubular segments in the second quarter. Lower selling prices are putting pressure on Tubular margins while market headwinds have increased in Europe. Higher imports and headwinds related to raw material costs and demand continue to hurt the USSE unit.

The company also stated that it is idling three blast furnaces in response to the softening market conditions. It will idle two blast furnaces in the United States and one in Europe to better align its global production with its order book.

A decline in steel prices during the June quarter is a key concern. U.S. steel prices tracked downward in the back half of 2018 and continued to retreat this year. The benchmark hot-rolled coil steel prices went downhill through the second quarter.

Higher domestic steel production contributed to the decline in U.S. steel prices. As such, weaker steel prices may weigh on U.S. Steel’s performance in the second quarter.

Nonetheless, U.S. Steel is expected to benefit from its actions to improving its cost structure and operations. The company is implementing an asset revitalization plan at its Flat-Rolled segment aimed at improving its profitability and competitiveness. These actions are expected to deliver margin benefits.

Zacks Model

Our proven model does not show that U.S. Steel is likely to beat estimates this quarter. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Earnings ESP: Earnings ESP for U.S. Steel is -0.21%. The Zacks Consensus Estimate for the second quarter is currently pegged at 40 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: U.S. Steel currently carries a Zacks Rank #3, which when combined with a negative ESP, makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some other companies in the basic materials space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Arconic Inc. (NYSE:ARNC) has an Earnings ESP of +0.83% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barrick Gold Corporation (NYSE:GOLD) has an Earnings ESP of +0.70% and carries a Zacks Rank #2.

Carpenter Technology Corporation (NYSE:CRS) has an Earnings ESP of +0.27% and carries a Zacks Rank #3.

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