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Photograph by AFP via Getty Images
Iconic American commodity producer United States Steel has had it tough lately. Earnings are falling, and the dividend has been cut. The stock is down about 58% over the past 12 months, trailing far behind steel peers, as well as the
S&P 500
and
Dow Jones Industrial Average.
Trade conflict, weak demand, and internal cost factors all played a role in the the company’s recent troubles.
U.S. Steel
(ticker: X) reports fourth-quarter and full-year earnings after the close of trading Thursday. Long-suffering investors will be looking for some relief, hoping 2020 looks better.
Here’s what to expect, along with some recent history.
- Wall Street expects the company to lose $1 a share in the quarter and report $2.8 billion in sales.
- U.S. Steel earned $1.82 in the fourth quarter of 2018 from $3.7 billion in sales. Quarterly sales are expected to drop more than 25%. It’s been a tough year indeed.
- It’s been hard, however, for the entire sector. Benchmark steel prices are down almost 20% year over year. U.S. Steel peer
Nucor
‘s (NUE) 2019earnings fell year over year too, but only by about 6%.
Steel Dynamics
(STLD) annual earnings fell about 12% in 2019.
- Weaker earnings hurt all steel stock prices. Nucor shares are down about 14% over the past 12 months. Steel Dynamics stock is off 14%. U.S. Steel shares, again, have been hit much harder.
- Cost structure explains why U.S. Steel has fared worst. Nucor and Steel Dynamics make steel using electric arc furnace technology, which eliminates the need for costly infrastructure like ore mining and blast furnaces. U.S. Steel, on the other hand, uses older steel-making technology, making its earnings more volatile than peers.
- U.S. Steel, for its part, is trying to change that, investing in electric arc furnaces. It’s a good idea. But the capital required to build new facilities makes some on Wall Street nervous.
- Industry inventories, a leading indicator for steel pricing, have been coming down in recent months. That’s a positive factor for the sector. But demand has been weak. “Energy [and] auto [are] subdued, construction remains resilient,” wrote KeyBanc analyst Philip Gibbs in a recent research report. That’s a double whammy for U.S. Steel. The company is relatively larger in energy and auto markets. Nucor, on the other hand, makes more construction steel.
- M&A is also roiling the sector. Cleveland Cliffs (CLF) and AK Steel (AKS) plan to merge. The deal shakes up the market for pig iron—which comes out of a blast furnace—and steel products—which come out of downstream operations like a basic oxygen furnace. Cleveland Cliffs wants to sell pig iron into the marketplace, instead of steel, marrying its ore with AK’s blast furnaces. (Ore is raw material for pig iron.) It’s a bold strategy. And analysts might ask U.S. Steel management if they can pursue something similar.
- Earnings shouldn’t be too much of a surprise Wednesday. The bad news is already out. U.S. Steel provided updated guidance and announced a dividend cut in December, saying it was idling facilities in the Midwest. The prospect for better supply/demand balance from lower U.S. production, however, hasn’t helped shares. Since late December, U.S. Steel stock is off more than 30%.
The steep decline raises the question: How bad can it get? Relative to other steel producers, U.S. Steel shares are almost as cheap as they have been at any point over the past decade. Things were worse at the end of 2015 when U.S. Steel stock was around $8. So hopefully the answer for investor will be: not much. The price in late 2015 is just 11% lower from recent levels.
The company hosts a conference call for analysts and investors Friday morning at 8:30 a.m. ET.
