08/08/14 – Why U.S. Steel Still Can Deliver More Upside
U.S. Steel has raced to 52-week highs on the back of consistent performances in the last four quarters, but more upside cannot be ruled out.
U.S. Steel will benefit from an improving demand environment, while the Department of Commerce ruling will work in its favor.
U.S. Steel’s business in Europe should improve due to an economic recovery in the region.
U.S. Steel’s bottom line is expected to improve in the next five years, as opposed to declines in the last five, setting the stage for a strong performance going forward.
U.S. Steel (NYSE:X) has turned in a solid performance in 2014. The steelmaker’s shares have gained 15%, outperforming the likes of ArcelorMittal (NYSE:MT), which is down around 18%. U.S. Steel is benefiting from an increase in steel demand, as a result of which it delivered a strong performance during the second quarter and issued a promising outlook. U.S. Steel had topped analysts’ expectations on earnings, and is currently trading at its 52-week high. Looking ahead, the good times look set to continue.
More improvement in the cards
According to U.S. Steel President and CEO Mario Longhi, “We expect operating income for our reportable segments and other businesses to increase significantly over the second quarter, as we return to normal operating levels.”
U.S. Steel’s second quarter performance was affected by unfavorable weather conditions, high repair and maintenance costs, and logistical issues. Since these challenges were specific to the second quarter, U.S. Steel’s performance should improve going forward.
Steel consumption in the U.S. is gaining momentum, and consequently, U.S. Steel expects its flat-rolled market in the region to be stable. Construction demand and order rates have seen significant improvements. Its contractual volumes are in line with its expectations, and it does not see any negative change in spot market purchasing patterns at its facilities. In addition, due to mill outages in the second quarter, supply chain inventories carried into the third quarter are very lean, which will help U.S. Steel boost its sales in the coming months.
Department of Commerce ruling to benefit U.S. Steel
Strength in onshore horizontal oil drilling also has lead to better demand for tubular steels. In a statement to the press, management said, “By the end of the second quarter, the oil direct rig count had climbed to the highest level.” It is expected that this momentum will continue in the third quarter as well, leading to an increase in the consumption of oil country tubular goods (OCTG).
Earlier, the company was struggling due to an influx of imports from cheap steel makers. But now, the U.S Department of Commerce’s initiatives will promote the growth of OCTG. As reported by Forbes:
The U.S. Department of Commerce has ruled that additional duties will be levied on imports of oil country tubular goods from eight countries, including South Korea. The DOC has ruled that OCTG imports from these countries are priced unfairly low and punitive tariffs will be imposed upon them. The inclusion of South Korean OCTG imports amongst those on which additional duties are to be imposed, is a reversal of the DOC’s preliminary ruling which exempted them from additional duties.
U.S Steel will be able to realize the effect of these changes after the third quarter. The restriction on imports will support steel pricing and encourage domestic demand, which will work to U.S. Steel’s favor.
Europe to improve
Along with these developments in the U.S., Europe also is on the road to economic recovery. U.S Steel has blast furnace and caster maintenance projects in this region, but these will be partially offset by lower raw material costs. But, in the long run, these moves should lead to higher efficiency for U.S. Steel. Hence, U.S. Steel is positioning itself strongly in the continent, and this will be beneficial going forward. According to the European Commission:
A slow and fragile recovery is ongoing in the EU and the euro area. GDP continued to expand in the third and fourth quarters, though at a modest pace. Looking ahead, GDP is expected to grow by 1.5% in the EU and 1.2% in the euro area this year, before speeding up more markedly in 2015 to 2.0% and 1.8% respectively.
U.S. Steel has been putting in consistent performances over the last four quarters. The company has beaten analysts’ estimates on all four occasions quite comfortably, and with the conditions improving, it should be able to maintain this streak. Moreover, U.S. Steel’s bottom line is expected to improve at a CAGR of 6.5% over the next five years, a stark contrast from the annual drop of almost 40% seen in the last five.
Source – SeekingAlpha.com