U.S. Steel: Here We Go Again?
Prominent U.S. Steel bear Gordon Johnson is out with a new note explaining why he sees further trouble ahead for the U.S. steel company.
ByBen Levisohn June 14, 2017 10:46 a.m. ET
Less than three months ago, United States Steel (X) was flying high as investors bet that President Donald J. Trump's pro-America policies would provide a boost for U.S. steel makers (AK Steel (AKS), Steel Dynamics (STLD), and Nucor (NUE) also benefited from this dynamic). But that all came to an end when U.S. Steel slashed its earnings before interest, tax, depreciation and amortization, or Ebitda, guidance, and announced new spending plans, causing shares of U.S. Steel lost quarter of their value.
Since then, a number of analysts have come out in support of U.S. Steel. Not Axiom Capital's Gordon Johnson, who might have been the only analyst who predicted U.S. Steel's big miss. He contends United States Steel will be forced to cut its EBITDA guidance again when it reports later this summer:
In short, based on our proprietary X EBITDA guidance tracker analysis, we believe the answer to this question is yes – to the tune of another ~28% cut (keep in mind that when X cut its EBITDA guidance by 15% on 1Q16 results [reported 4/25], the shares traded off 27% the next day). In short, our analysis looks at:
(1) the q/q ? in HRC spot prices as of X’s current and prior quarter earnings,
&
(2) the q/q ? in X’s EBITDA guidance as of the current and prior quarter earnings.
We then divide the q/q ? in EBITDA guidance by the q/q ? in HRC spot prices to arrive at an implied adjustment to forward EBITDA guidance for each dollar ? in HRC prices.
Finally, to formulate our estimate for the current quarter’s EBITDA guidance, we take the prior quarter’s implied adjustment to forward EBITDA guidance × the current quarter’s q/q change in HRC price (which updates daily).
While, admittedly, this approach looks at just one facet of X’s business, given, in general, Tubular- and European-steel mkt trends tend to move in tandem w/ the US mkt, we find our approach useful.
Importantly, however, on average, using a 90% confidence interval, over 4 observations (2Q16-1Q17), our approach has predicted X’s EBITDA within 96% of the guided number – X began guiding EBITDA this way in 4Q15, meaning only 4 observations are available.
As such, applying our approach, we see a ~28% cut to X’s 2017 EBITDA guidance as fated.
Shares of U.S. Steel have tumbled 3.9% to $21.03 at 10:42 a.m. today, while AK Steel has dropped 3.2% to $6.22, Nucor has fallen 1% to $59.89, and Steel Dynamics is off 1% at $35.32.