Morningstar | U.S. Steel's 3Q Results Closely In Line With Prior Guidance; Shares Fairly Valued
U.S. Steel reported encouraging third-quarter results that nearly matched the company's prior guidance. Full-year adjusted EBITDA guidance has been slightly decreased to $1.81 billion from $1.85-$1.90 billion. For 2018, we forecast adjusted EBITDA of $1.80 and adjusted earnings of $5.41 per share on $14.40 billion of revenue. Having updated our valuation model, both our near- and long-term forecasts are largely unchanged. Shares are fairly valued, trading slightly above our $25 per share fair value estimate.Our no-moat rating for U.S. Steel is unchanged. We applaud U.S. Steel's management team for the company's improved performance in 2018. ROICs are likely to exceed the company's cost of capital for the first time in many years. This is all the more impressive given the substantial reinvestment required by the company's asset revitalization program this year. Capital expenditures in 2018 will be roughly $1 billion versus $505 million last year and will remain elevated over the next two years.
The Flat-Rolled segment has capitalized on recent favorable market conditions, as both volumes and average selling prices rose sequentially in the third quarter. This allowed for an 11.4% operating margin, the first double-digit operating margin achieved by the segment since the third quarter of 2014. The performance of the U.S. Steel Europe segment was less impressive, with volumes, pricing, and profits declining on a sequential basis. Perhaps most noteworthy is the fact that the Tubular Products segment restored profitability at the operating income line in the third quarter. Although operating income was only a modest $7 million, the business had generated $62 million of losses in the first half of the year and nearly $582 million of cumulative losses from 2015 to 2017.
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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