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US Steel Stocks' Q4 Earnings: Will Lower Prices be a Drag?

Anindya Barman

U.S. steel makers reaped the benefits of higher domestic steel prices in 2018, which helped them to deliver strong earnings that year. However, a slump in steel prices and lower demand for the commodity amid the global slowdown hurt bottom lines of U.S. steel companies through the first three quarters of 2019. Moreover, last month’s profit warnings from some of the major U.S. steel makers have raised concerns about a possible weak fourth quarter for the American steel industry.

Are U.S. steel stocks bracing for a tough fourth-quarter earnings season? Let’s take a look.

Downbeat Guidance from Major U.S. Players

Some of the prominent U.S. steel producers came up with weaker-than-expected earnings guidance for the December quarter last month. Nucor Corporation NUE, the biggest U.S. steel producer, was the first to issue disappointing guidance for the fourth quarter.

The steel giant sees earnings per share (EPS) in the range of 25-30 cents for the fourth quarter. This reflects a sequential decline from EPS of 90 cents in the third quarter and a fall from $2.07 recorded in the year-ago quarter. The company expects performance of its steel mills unit to sequentially decline in the fourth quarter due to lower steel prices. The Zacks Consensus Estimate for the fourth quarter for Nucor currently stands at 34 cents, reflecting a year-over-year decline of 83.6%.

Steel Dynamics, Inc. STLD also provided weak view for the fourth quarter as it expects lower profits in its steel operations in the quarter. The steel producer expects EPS in the range 49-53 cents for the quarter. The projected figure suggests a fall from 69 cents recorded in the third quarter and $1.17 in the year-ago quarter.  Consensus earnings estimates for the fourth quarter currently stands at 56 cents, indicating a year-over-year decline of 57.3%.

Considering the two planned outages, margin compression due to lower steel prices and seasonally lower shipments, Steel Dynamics expects profitability from steel operations to be sequentially lower in the fourth quarter.

Moreover, United States Steel Corp. X issued underwhelming guidance for the fourth quarter. The company projects adjusted EBITDA for the quarter to be a loss of roughly $25 million, excluding an expected restructuring and other charges of $225 million. The company stated that steel markets in North America are recovering. However, the Tubular and Europe businesses remain under pressure.

U.S. Steel expects adjusted loss per share for the fourth quarter to be around $1.15. This compares to earnings of $1.82 a share the company recorded a year ago. The Zacks Consensus Estimate for the fourth quarter is currently pegged at a loss $1.14.

The company stated that flat-rolled steel market conditions are improving. However, results of the unit are expected to be affected in the fourth quarter, partly due to lower shipments and steel selling prices.   

U.S. Steel also cut its quarterly dividend to a penny per share from 5 cents. Per the company, the move is expected to generate around $25 million of annual cash savings starting in 2020. Moreover, the company has stopped stock repurchase program and has decided to formally terminate the program.

Weaker Steel Prices to Dent Earnings?

The Trump administration’s imposition of 25% steel tariffs largely helped U.S. steel companies to rack up solid earnings in 2018. The tariffs provided a boost to U.S. steel prices in 2018, driving profits and cash flows of American steel makers.

However, the U.S. steel producers were plagued by a sharp decline in domestic steel prices in 2019. After an initial tariff-induced rally, U.S. steel prices had been on a downswing in 2019 and were down for much of the year. Notably, the benchmark hot-rolled coil steel (HRC) prices dropped through the first three quarters of 2019.

In fact, after rallying to multi-year highs in 2018 on the back of Trump-imposed tariffs, U.S. steel prices fell back to the pre-tariff levels in 2019. HRC prices reached peak level of roughly $920 per short ton (st) in July 2018. Sliding steel prices, weaker demand across major domestic end markets and trade tensions weighed on U.S. steel producers’ stocks last year.

With the exception of AK Steel Holding Corp. AKS, all other major American steel makers underperformed the broader market last year (with U.S. Steel being the worst performer) despite decent gains in share prices in December on U.S.-China trade deal prospects. AK Steel’s shares surged in December after leading iron ore miner, Cleveland-Cliffs Inc. CLF announced the acquisition of the former in an all-stock deal worth $1.1 billion.

Higher domestic supply resulting from a ramp up in production contributed to the sharp decline in U.S. steel prices in 2019. Driven by the tariff impetus, U.S. steel mills rushed to bring back capacity and drive production, leading to oversupply in the market.

The global economic downturn and softer steel demand are other key factors for the decline in prices. A slowdown in global manufacturing activity, partly due to the trade war, hurt demand for steel last year. Softness across major end-use markets such as automotive, construction and energy led to demand weakness.

U.S. steel producers contended with sluggish steel demand in 2019. Demand in the United States has been hit by a downslide of the country’s manufacturing sector which contracted for the fifth month in a row in December amid trade tensions. As such, soft demand may hurt fourth-quarter profitability of domestic steel makers.  

Meanwhile, driven by consecutive price hike actions by major U.S. steel mills and supply-side actions, U.S. steel prices gained some traction over the past couple of months. HRC prices gained some upward momentum in December hitting $600 per st during the month. However, the impact of the price recovery will mostly get reflected in U.S. steel companies’ first-quarter 2020 results.

It is worth noting that domestic steel prices fell sharply during the third quarter of 2019 and also slumped to a three-year low in October. The effects of these price declines are expected to get reflected on U.S. steel companies’ shipments for the fourth quarter which is also typically a seasonally weak quarter. Lower U.S. steel prices also likely to have put downward pressure on selling prices of American steel makers and crumbled their profit margins in the quarter to be reported.

Steel Dynamics currently sports a Zacks Rank #1 (Strong Buy), while Nucor, U.S. Steel and AK Steel each carry a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank stocks here.

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