U.S. Steel (X) Poised On Carnegie Way, Improved Prices

On Aug 31, we issued an updated research report on steel giant U.S. Steel (NYSE:X) .

U.S. Steel posted a narrower loss in second-quarter 2016, benefiting from better market conditions. Management’s focus on improving the cost structure led to an improvement in margins in the quarter. Adjusted loss was lower than the Zacks Consensus Estimate. Revenues, however, fell by double digits and missed expectations.

The company, in its second-quarter call, said that it envisions further improvement in market conditions for its Flat-Rolled and European divisions. Recent favorable preliminary trade rulings on steel trade cases have been a catalyst for improved domestic market conditions. The company also expects to gain from increased prices for flat-rolled products in second-half 2016.

Steel market conditions have improved lately, driven by favorable developments on steel trade cases in the recent past, providing some reprieve to U.S. steel producers. Steel prices also recovered during the second quarter, helped by punitive trade actions that led to levy of tariffs on imports.

U.S. Steel is aggressively pursuing actions to improve its cost structure through its “Carnegie Way” program that includes manufacturing process/logistics improvements and savings on selling, general and administrative (SG&A) costs. These efforts delivered $815 million of benefits last year, most of which were realized in the Flat-rolled segment.

The Carnegie Way program is expected to continue to generate meaningful benefits in 2016. U.S. Steel also expects roughly $400 million of cash benefits from working capital improvements in 2016, mainly associated with better inventory management. The company should also gain from healthy demand in the automotive space, a key end-use market for steel.

However, depressed oil prices are still hurting the company’s business in the energy market. The low oil price environment has prompted several energy companies to dial back drilling plans. U.S. Steel’s Tubular segment registered a loss in the second quarter as shipments were hurt by lower average rig counts.

Moreover, the steel industry is still not out of the woods. The industry is still under relentless pressure caused by years of excess steel-making capacity. Despite some favorable developments on the import front in the recent past, unfairly-traded, subsidized imports are still flowing into the American market due to foreign producers' overcapacity.

China, which accounts for around 50% of global steel output, continues to pose a threat to the U.S. steel industry. The Chinese steel industry continues to reel under massive excess steel capacity and weak domestic demand amid a sluggish economy. China’s steel exports jumped 9% year over year to 57.12 million tons in the first six months of 2016 (per data released by the General Administration of Customs), signaling continued demand weakness at home.

U.S. Steel is a Zacks Rank #3 (Hold) stock.

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Other Stocks to Consider

Better-ranked stocks in the steel space include ArcelorMittal (NYSE:MT) , Gerdau S.A. (NYSE:GGB) and Ternium S.A. (NYSE:X) . While ArcelorMittal sports a Zacks Rank #1 (Strong Buy), both Gerdau and Ternium hold a Zacks Rank #2 (Buy).

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