Morningstar | U.S. Steel Raises 2018 Guidance But Shares Still Plummet; We See Further Downside at Our $25 FVE. See Updated Analyst Note from 02 Aug 2018
In the second quarter, U.S. Steel grew profits across both its flagship U.S flat rolled operations and its European steelmaking business. The tubular operations were once again loss-making. Adjusted EBITDA rose 20% year on year and we expect profits to rise further in the third quarter. Having updated our valuation model, our fair value estimate is unchanged at $25 per share. Although returns on invested capital are set to safely exceed our assumed cost of capital this year, we don't believe this to be sustainable and we maintain our no-moat rating.Even though management raised its full-year adjusted EBITDA and earnings guidance, shares traded sharply lower after the earnings release. We surmise that, amid continued elevated steel prices, investors were hoping for an even more significant guidance increase. For the full year, U.S. Steel is now guiding to adjusted EBITDA of $1.85-1.90 billion and earnings of $925-975 million. We forecast $1.82 billion and $934 million, respectively.
U.S. flat-rolled profits should increase in the second half of the year, particularly as U.S. Steel brings both of its Granite City Works blast furnaces back on line. Beginning in October, this should provide an incremental 175 thousand tons of production per month. However, free cash flow will remain lower than might otherwise be expected due to the company's massive $2 billion asset revitalization program.
Over a longer time horizon, we maintain a negative outlook for U.S. steel prices as the spread between U.S. and world export prices contracts. Additionally, in China, we expect decelerating fixed asset investment and waning stimulus effects to weigh on global steel prices. A deflationary environment for steel prices tends to hit U.S. Steel more severely than other steel companies we cover due to the company's self-sufficiency in iron ore. Therefore, although adjusted EBITDA margins reached 12.5% in the second quarter we forecast margins of only about 10% midcycle.
United States Steel is a steel producer of flat-rolled and tubular products with production operations in the United States and Europe. The company is also engaged in railroad services and real estate operations. The company's segments are: North American Flat-Rolled, which produces slabs, strip mill plates, sheets and tin mill products; U. S. Steel Europe, which produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as heating radiators and refractory ceramic materials; and Tubular Products, which produces and sells electric resistance welded steel casing and tubing (known as oil country tubular goods), and standard and line pipe and mechanical tubing.
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