Earnings Preview : United States Steel Corporation (NYSE: X) First Quarter 2010
Monday, April 26, 2010 12:09 PM

United States Steel Corporation (NYSE: X) is scheduled to report its Q1 2010 results after the market closes on April 26. 2010. While the non-recurrence of LIFO gains and lags in indexed-pricing coupled with higher raw material costs will serve to mask QoQ improvement for X in 1Q, underlying fundamentals are improving and the market is underestimating X's earnings leverage to further gains in volumes and pricing. Shipments and pricing will continue to improve post 1Q, but profits should see an even sharper acceleration as idled facility costs ease (6 of 7 locations in Flat-rolled should be running by quarter-end and all 5 USSE furnaces), maintenance costs decline, and fixed-cost utilization improves.

United States Steel manufactures and sells a variety of steel mill products, coke and taconite pellets. Primary steel operations are the Gary (Indiana) Works, the Fairfield (Alabama) Works near Birmingham, the Mon Valley Works ( which includes the Edgar Thomson steelmaking and Irvin finishing operations) on the Monongahela River near Pittsburgh, and U. S. Steel Kosice in the Slovak Republic. 
As for Q4 2009, X reported a Q4 2009 net loss of $267 million, or $1.86 per diluted share, compared to a Q3 2009 loss of $303 million, or $2.11 per diluted share, and Q4 2008 net income of $290 million, or $2.50 per diluted share. Other items not allocated to segments in Q4 of 2009 consisted of a pre-tax charge of $49 million related to the accrual of estimated environmental remediation costs at a former production site, which reduced Q4 2009 net income by $31 million, or 21 cents per diluted share. The company reported a Q4 2009 loss from operations of $329 million, compared with a loss from operations of $412 million in Q3 of 2009 and income from operations of $522 million in Q4 of 2008. As of December 31, 2009, U. S. Steel had $1.2 billion of cash and $2.5 billion of total liquidity as compared to $0.7 billion of cash and $2.1 billion of total liquidity at December 31, 2008.
Analysts' estimates for Q1 2010 range from a low of $-1.70 to a high of $-0.96, compared to a consensus estimate of $-1.42, with number of estimates being 10and the co-efficient variance -18.26. With Lake Erie and Gary #14 furnace down for most of Q1, X's Flat-rolled segment is operating with at most 75% of its capacity, which is still a significant burden. Assuming demand (domestic and export) continues to improve, Gary #14 (X's biggest and most efficient furnace) would be operating in 2Q. Earnings ramp pushed to 2H 2010 as lagging price increases and rising raw material costs (especially scrap) are likely to weigh heavily on earnings, especially in the 1H 2010. These headwinds, however, should be partially offset by a faster-than-expected recovery in Tubular, where improved volumes have led to a greater-than-expected jump in profitability. Results in Flat-rolled should be flat QoQ in Q1 2010 as underlying fundamentals are still improving. Sequentially, shipments and pricing are likely to be up in Q1 2010, though pricing gains should lag the spot market due to the company's indexed-based contract prices. While costs should benefit from declining idled facility costs (which totaled $80mm in 4Q09) and maintenance costs, the 4Q 2009 LIFO benefit of $55mm will not carry into the Q1 2010. Results at USSE in 1Q 2010 should be similar to 4Q 2009 levels. While shipments should continue to increase, the segment will face higher raw material costs. Tubular rebounding to be quicker than expected and Tubular results should decrease in 1Q 2010 from better-than-expected levels in 4Q 2009, but still remain profitable and post better-than-expected results.
The stock closed $59.24, up 0.85% on April 23, 2010 and most analysts' rate the stock a relative Overweight with an average price target of $70.


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