Why U.S. Steel Is a Stock to Avoid

United States Steel (X) is in a soup this year as its stock has dropped over 50% in 2015. This is not surprising if we consider the weakness in the steel market in the U.S. due to the influx of cheap imports that has led to weakness in pricing. As a result, when U.S. Steel released its latest results, its revenue was down 34% year-over-year and it swung to a loss as well.

U.S. Steel declared an adjusted net loss of $115 million as compared to adjusted earnings of $25 million in the prior-year period. The company reported sequential and year-over-year declines in both its top and bottom lines for the quarter primarily driven by the ongoing weaker global commodity pricing environment and slower market recovery rate.

What next?

U.S. Steel, however, has a strong liquidity position.
The company has entered into a $1.5 billion credit facility that is forecasted to mature in 2020. The company can use this credit line to improve its operational performance. In general, U.S. Steel is demonstrating excellent operational results amid tough global commodity demand and pricing environment driven by its planned cost optimization efforts.

These have enabled the company to sustain a healthy cash position on its balance sheet while encouraging it to invest strategically into new growth opportunities and deliver improved shareholder returns. More importantly, its cost optimization efforts have allowed it to align costs with reduced operating levels, enabling the company to deliver 2.712 million tons of net shipments in the second quarter of 2015 at an average realized price of $695 per ton. This can be compared to net shipments of 2.617 million tons in the first quarter of 2015 at an average realized price of $768 per ton.

However, the company saw a quarter-over-quarter reduction in the net shipments for the tubular segment, recorded at 92 thousand tons in the second quarter of 2015 at an average realized price of $1,651 per ton. This was way below 220 thousand tons of net shipments at an average realized price of $1,637 per ton during the first quarter of 2015. However, the company has successfully enhanced its average realized prices, reflecting a stronger product mix.

Looking ahead, U.S. Steel is focused on right-sizing its production at flat-rolled and tubular steel segments at minimized costs to successfully traverse through the tough global operating scenario while maintaining healthy margins. But the company is seeing weakness in the international market, and this could hurt its performance further.

In fact, U.S. Steel’s net shipments in Europe during the second quarter of 2015 declined to 1.1 million tons at an average realized price of $533 per ton as compared to net shipments of 1.3 million tons at an average realized price of $530 per ton. The shipments were also negatively impacted by the strong U.S. dollar. The steel major was able to contain its sharp fall in net shipments for the quarter at satisfactory realized price mainly due to its continued cost-optimization initiatives.


As such, it is evident that U.S. Steel is facing weakness in key end markets and this will impact is financial performance going forward. In addition, the company also carries a lot of debt to the tune of $3.49 billion, which is higher than its cash position of $1.21 billion. So, considering all the points, I think it will be wise for investors to avoid this steel stock.
Published on Sep 22, 2015
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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