United States Steel Is Capitulating

Jun. 23, 2019 2:25 PM ETUnited States Steel Corporation (X)14 Comments15 Likes
Leo Nelissen profile picture
Leo Nelissen
16.17K Followers

Summary

  • Leading economic indicators not only confirm my growth slowing call but point at economic contraction on the mid-term.
  • United States Steel has revealed plans to idle three blast furnaces as demand and input inflation continue to be headwinds.
  • The stock is way down over the past few weeks and continues to be a dangerous place to be.

On May 3rd, I wrote an article covering United States Steel's (NYSE:X) earnings release. Back then, I advised traders to stay away despite a strong earnings beat thanks to higher shipments and better pricing. In this article, I am going to update my call and tell you why the stock continues to be in a very tricky and dangerous spot. This never has been a stock to toy around with - especially not given that economic fundamentals have caused the company to come in with weak Q2 guidance and bad news regarding steel production.

Source: United States Steel

This Could Be The Next Step

Before I go any further, let me quickly tell you why it matters so much to me to discuss United States Steel. The company is one of the oldest and largest steel producers of the US and one of the most cyclical stocks on the market. This stock is one of the most rewarding tools to trade economic trends if done properly. Unfortunately, as I will further discuss in this article, we are in the midst of an economic slowdown. After the most recent post-earnings (one day) rally, the stock declined more than 30% and has recovered 23% since the bottom on the 31st of May.

A lot has changed between since the start of May.

Let's start with the most important news, which more or less applies to the entire economy. The graph below was used in my previous article. It shows the comparison between the ISM manufacturing index and the US Steel stock price. The ISM manufacturing index is one of the most important economic leading indicators which shows why US Steel has no chance to rally without support from economic expectations. US Steel is even so cyclical that all it needs to push this stock lower is the chance of peaking economic growth as the stock went down way before the ISM index started to fall.

Source: TradingView

Unfortunately, my growth slowing call is entering the next stage as the first regional manufacturing surveys for the month of June are coming in well below expectations. Both the Empire State and Philadelphia manufacturing surveys declined way more than expected and are currently implying an ISM index below 50.0 as you can see below. It is starting to look a lot like 2015 when economic momentum started to accelerate to the downside.

This is impacting not only the stock price but also the company's guidance.

In a recently published second-quarter outlook, the company forecasted lower than expected second-quarter profits and said it was idling three furnaces - two furnaces in the US and one in Europe. Q2 adjusted earnings are expected to come in at $0.40 per share, which is below $0.51 analysts were looking for.

Flat-rolled steel adjusted EBITDA is expected to be negatively impacted by falling steel prices and softening market demand. Also, shipments are expected to be lower due to flooding in the southern United States.

The Great Lakes B2 blast furnace is expected to remain idled after the completion of current planned outages. The company will also temporarily idle the south blast furnace.

The idling of a blast furnace in Europe is the result of increasing level of steel imports and continued market headwinds related to raw material costs and demand.

All the company can do at this point is to further focus on its efficiency measures as the company has no way of dealing with external steel demand and input inflation. That's the hard reality of macro factors.

"While market conditions have softened, we remain focused on executing the value creation strategy that is underway. We believe that the investments being made to improve costs and expand product capabilities will create a more differentiated and agile company, combining our competitive advantages with state-of-the-art sustainable steel technology to create long-term value for our stockholders, customers and employees."

While the stock went up immediately after the bad news, the stock is currently down 4.1% on a day when the market continues to rip higher (06/20) along with basic materials. Note that this is happening on another bad day for the US dollar, which is generally speaking quite good for domestic steel producers. A lower dollar can be seen as an unofficial tariff as it makes exporting steel to the US more expensive.

Source: FINVIZ

And speaking of the dollar, I will be watching it closely as I expect this to be the part of a major bull case for US Steel. All we need is a further dollar decline and an economic bottom to get a 2016 style recovery. Unfortunately, at this point, it seems like we are still in a 2015 like situation where economic growth has not yet bottomed.

Extra: if you want to know all details about my dollar thesis, I highly recommend you to spend a few minutes reading this article.

All things considered, US Steel is not yet out of the woods as economic growth has more than likely entered the next stage of the slow-down. If regional indicators are right, growth slowing could very soon turn into real contraction. US Steel is already taking measures by idling furnaces in both the US and Europe due to falling demand. I expect the stock price to continue to be a volatile casino and I won't be buying until I see signs of an economic bottom. At that point, I will start buying this stock aggressively. Until then, I think it's best to stay on the sidelines.

Stay tuned!

Thank you very much for reading my article. Feel free to click on the "Like" button and don't forget to share your opinion in the comment section down below!

This article was written by

Leo Nelissen profile picture
16.17K Followers
I'm a Buy-Side Macro Expert/Financial Markets Analyst. On Seeking Alpha, I discuss a wide range of topics including long-term dividend (growth) investments, mid-term trading opportunities, commodities, rates, and related. My DMs are always open. Also, I'm on Twitter (@Growth_Value_) in case you want to say hi! Long-Term Dividend HoldingsPSA, DUK, HD, PEP, RTX, UNP, VLO, DE, ABBV, CAT, HBAN, NSC, LHX, XOM, HII, AAPL, XEL, CVX, CP, LMT, NOC, NDAQ, CME, DHR
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Disclosure: I/we 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.

Additional disclosure: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

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