Photographer: Ty Wright/Bloomberg

U.S. Steel Plunges by Record Amount After ‘Abysmal’ Earnings

Updated on
  • CEO says asset-revitalization plan will take 3-4 years
  • Adjusted Ebitda fell short of all nine analyst estimates

U.S. Steel Corp. plummeted after the nation’s second-biggest producer said it’s speeding up plant upgrades to resolve shortcomings that choked earnings even as prices of the metal surged.

The Pittsburgh-based company’s shares lost as much as 26 percent on Wednesday, the steepest drop since at least 1991. The stock extended declines before the start of regular trading as Chief Executive Officer Mario Longhi tried to defend his strategy on an earnings call with analysts.

Longhi is paying the price of spending frugally on the company’s blast furnaces during lean years when a flood of cheap Chinese imports kept prices low and forced producers to defend margins. The investment backlog means he’s now unable to reap the rewards of a price recovery spurred by government restrictions on imports.

The CEO may have focused too much on lobbying for trade cases to defend the U.S. steel industry and too little on improving operational efficiency, according to Gordon Johnson, an analyst at Axiom Capital Management.

“They’re structurally worse off than everyone else given the age of their blast furnaces and that everyone else is in electric-arc furnaces,” Johnson said by telephone. “This is going to cost them a lot of money and who’s going to say they can catch up?”

In the earnings report released after the close of regular trading Tuesday, U.S. Steel posted adjusted earnings before interest, taxes, depreciation and amortization of $74 million, falling short of all nine analysts’ estimates. 

“We have made the strategic decision to accelerate our efforts to resolve the issues that challenge our ability to achieve sustainable long-term profitability,” Longhi said. That asset revitalization plan, which is part of the so-called Carnegie Way efficiency model, will take three to four years, he said.

The results, in which the company also cut its annual Ebitda forecast to $1.1 billion from $1.3 billion, were described by Jefferies LLC analyst Seth Rosenfeld as “abysmal” and driven by “operational issues and a myriad of other headwinds.” 

Disruptions Signaled

While management’s plans may be the best long-term strategy, “the disruption caused by these efforts will ultimately cap U.S. Steel’s ability to participate in currently favorable markets,” Rosenfeld said.

The quarterly results contrast those of the biggest U.S. steel producer, Nucor Corp. The Charlotte, North Carolina-based company painted a rosier picture for the current quarter, citing higher margins at its plate mills and increasing profitability in its downstream products. Nucor operates steelmaking furnaces that use scrap instead of iron ore as its main component, a process that uses less energy and is more efficient than the blast furnaces that U.S. Steel mostly relies on.

“U.S. Steel results and relative operational performance momentum, in our opinion, appear more company-specific versus an indictment on industry fundamentals,” Phil Gibbs, an analyst at KeyBanc Capital Markets, said in a note to investors on Wednesday.

U.S. Steel shares quadrupled last year as domestic steel prices recovered just as its costs declined after a series of cutbacks undertaken in an efficiency program named after founder Andrew Carnegie. This year, the stock is down about 30 percent.

Detail Sought

While CEO Longhi defended the strategy of accelerating the asset-revitalization plan, analysts on the call repeatedly asked for greater detail about the duration of the plan, the total amount that would be spent, and to which assets the money would be allocated for upgrades.

“I mean, you cut your guidance by 35 percent on the downline in a rising rate environment, in an improving environment,” David Gagliano, an analyst at BMO Capital Markets, said during the call. “So I think it’s really important that the investment community in general to get more color and more information regarding the things that you highlighted here.”

The average price of U.S. hot-rolled steel coil, a benchmark product used in everything from bridges to microwaves, rose 55 percent in the first quarter from a year earlier, helped by successful U.S. trade cases against imports.

Domestic steelmakers have benefited further from the commitment by President Donald Trump’s administration to seek various trade actions to protect the industry. 

Last week, Longhi stood with Trump in the Oval Office as the president described the opening of an investigation into whether steel imports hinder national security as “a historic day for American steel and most importantly for American steel workers.”

— With assistance by Joseph Richter

(Updates with comment from analyst in fourth and fifth paragraphs.)
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