Earnings Preview : United States Steel Corporation (NYSE: X) Second Quarter 2010
Friday, July 23, 2010 4:07 PM

United States Steel Corporation is scheduled to report its Q2 2010 results after the market closes on July 26, 2010. X should steadily benefit from three tailwinds through the remainder of 2010: 1) continued sequential improvement in underlying industry fundamentals, 2) higher realized prices as lagging indexed contracts "catch up" to spot prices, and 3) continued benefits from fixed-cost absorption and lower idled facility costs as Flat-rolled operations come back online to meet rising demand. Specifically, we believe management would not re-start Gary #14 and Lake Erie without a reasonable amount of visibility into a solid order book.
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 Q1 2010, X reported loss from operations of $57 million, a significant improvement from the Q4 of 2009, which posted a loss of $329 million, primarily driven by Flat-rolled segment performance. In the quarter, net loss amounted to $157 million, or $1.10 per diluted share, an improvement of $0.76 per diluted share as compared to Q4 of 2009. Net sales were $3.9 billion, an increase of 16% from Q4 of 2009 and the Company maintained a strong liquidity position with $1.4 billion of cash and $2.9 billion of total liquidity. Total shipments amounted to 5.4 million tons, an increase of 16% from Q4 of 2009
Analysts' estimates for Q2 2010 range from a low of $0.42 to a high of $0.75, compared to a consensus estimate of $0.60, with number of estimates being 9 and a coefficient variance of 18.26. Flat-rolled 2Q10 operations are expected to improve upon 1Q10 results and management projects another positive operating profit next quarter will maintain the segment's momentum. Sequentially, increased shipments should track healthy order rates, which in turn will help utilize the recently re-started Gary #14 furnace, representing about 15% of U.S. Steel's North American capacity. Management expects to restart Lake Erie Works by late 2Q10, an implicit confirmation of an improving demand outlook given management's discipline in matching production with market conditions. Margins will likely benefit as rising spot and contract prices (as well as lower energy costs) outweigh higher scrap, coke, and maintenance costs. 2Q10 results at USSE should top 1Q10 performance. Shipments are projected to remain relatively constant despite an outage at the #2 blast furnace in Serbia during the quarter. The company expects the Serbian blast furnace to reach full production before the end of 2Q10. In addition, higher euro-based prices should more than offset rising raw material costs. Tubular results should increase sequentially in 2Q10 on higher volumes and better pricing. Following 1Q10 volumes which beat expectations, shipments should be up again q/q (and increase throughout the year) as inventories work off from record highs and demand recovers along with a rising North American rig count. See Figure 1 below for further details. Average segment pricing should more than offset rising costs for steel substrate, boosting margins above the $185/ton operating profit realized in 1Q10.
The stock closed $44.79, up 1.13% on July 21, 2010, and most analysts' rate this stock as a relative Overweight with an average price target of $57.


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