U.S. Steel: Outlook Still Remains Sluggish?

Oct.11.13 | About: United States (X)

The sluggish economic growth and unresolved high sovereign indebtedness has weakened global investments and adversely impacted consumer spending habits. Both the businesses and the individual consumers tend to save more and spend less. This attitude has negatively affected the demand for steel. Considering recent trends, steelmakers have revised their forecasts as demand is expected to decline further, especially in Europe and North America.

This is negatively affecting the United States Steel Corporation (NYSE:X) which is causing the company to continually incur losses.

The company operates in North America and Central Europe, the regions in which there is the least demand for steel. It mainly generates revenues from three segments: flat rolled products, U.S. steel Europe (USSE) and tubular. Its North American business also includes transportation services and real estate operations but that does not constitute reportable segments and therefore falls under the category of "other" businesses.

Insight into the company's financials will give us a deeper understanding about its financial position.

Financial Performance

A poor macroeconomic situation has hit the company's revenues badly. The company started recovering from the economic recession in 2010 but in 2012 its net revenues started declining again as a result of anemic economic growth.

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Source: 2012 Annual Report

Its revenues in the last four quarters show a fluctuating trend. The revenue in the first quarter of this year grew by 2.41% but in the fourth quarter of 2012 and the second quarter of this year revenues showed a negative growth trend. The growth in 4Q12 and 1Q13 was -3.55% and -3.61%, respectively. Concerning year-over-year growth, the percentage was -11.2% and -11.7% in the first and second quarters of 2013, respectively.

In the latest reported quarter revenues declined as a result of lower shipments in the flat rolled and tubular products segments along with the lower average realized prices. The year-over-year price decline in these two segments was by 6.08% and 11.5%, respectively. The shipments in the flat rolled segment decreased due to the maintenance projects and the ongoing lockout at its Lake Erie Works.

The shipments in the U.S. steel Europe segment increased compared to 2Q12 data but an 8.5% decline in the average realized prices decreased the segments' year over year earnings by approximately 71%.

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The operating margin of U.S. Steel shows the same trend as its revenues. In 2Q13 the company incurred operating losses due to higher operating costs in the flat rolled segments and higher iron ore costs in the European segment. The operating costs in the flat rolled segment increased as a result of higher repair and maintenance costs as well as higher natural gas costs partly offset by lower raw material costs.

The company incurred net losses in the last three quarters as evident in its net margins. In the first quarter of 2013, the net margin declined as a result of high interest and finance costs. The company incurred a net loss of $73 million that included a $22 million expense related to the repurchases of a $542 million principal amount of its 4% senior convertible notes. These notes will be due in 2014.

Its losses per share are increasing on a year-over-year basis. In 2012 the company's per share loss was $1.09 compared to $0.86 and $0.37 in 2011 and 2010, respectively. In the first two quarters of 2013, the loss increased further, compared to the last two quarters of 2012, indicating a higher per share loss for the entire year of 2013 in comparison to 2012.

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The company's efficiency and ability to meet its short term obligations have also deteriorated in the first half of 2013, compared to 2012, due to an increase in its current liabilities. The number of liabilities rose because of the increased current portions of the long-term debt in the second quarter of 2013. Also, there is a significant increase in miscellaneous current liabilities affecting the company's liquidity position.

The company's total liabilities have decreased in the first half of 2013 as a result of a $542 million repayment of the long-term debt in each quarter. However, its ability to cover its obligations from its yearly cash flows has declined in the first half of 2013, in comparison to 2012, due to the net losses in both first two quarters of 2013.

Lower operating income and higher interest expenses have decreased the company's ability to pay interest expenses on its outstanding debt indicating that it is unable to generate enough cash flow to meet obligations.

Source: Yahoo Finance

Future Outlook

The company's outlook for the third quarter of 2013 is not very optimistic. Although the average realized prices are expected to increase in the third quarter the shipments in the flat rolled and European segment may decline. The prices are forecasted to rise considering increased spot market prices as well as a more favorable product mix. However, the shipments may decline due to the blast furnace outage at the Great Lake Works and the Lake Erie Works labor dispute.

The outlook for the tubular segment is more favorable than the other two segments as its shipments are expected to increase, in comparison to previous quarters. The tubular segment may also experience a decrease in operating costs. The operating costs are predicted to decrease due to improving operating efficiencies. This would also help in partly offsetting the poor performance of the other two segments.

Since 2010, the company has paid $0.05 per share of dividends in each quarter. Currently, there is no chance that it would raise its dividends, rather the dividends could decline due to the continuous per share losses incurred by the company.

In Conclusion: The above analysis indicates that US Steel has not reported satisfactory results in the last three quarters. Moreover, the unfavorable demand for steel in North America and Europe and the labor disputes inside the company leaves very little hope for a quick recovery. Therefore, in my opinion, the company's stock does not pose very tempting opportunities for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.