U.S. Steel (X) Warms Up To Q3: Another Earnings Beat Coming?

United States Steel Corporation (NYSE:X) is set to release its third-quarter 2017 results after the bell on Oct 31.

The steel giant recorded a profit of $261 million or $1.48 per share in second-quarter 2017, helped by strong results in its Flat-Rolled unit. Adjusted earnings came in at $1.07 per share for the quarter that topped the Zacks Consensus Estimate of 40 cents.

Revenues rose roughly 22% year over year to $3,144 million in the quarter, also surpassing the Zacks Consensus Estimate of $2,975 million.

U.S. Steel beat the Zacks Consensus Estimate in two of the trailing four quarters, while missing in the other two with an average positive surprise of 584.1%.

U.S. Steel has outperformed the industry it belongs to over a year. The company’s shares have gained around 43.4% over this period, compared with roughly 32.1% gain recorded by the industry.

Let’s see how things are shaping up for this announcement.

Earnings Whispers

Our proven model shows that U.S. Steel is likely to beat the Zacks Consensus Estimate this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is the case here as you will see below:

Zacks ESP: The Earnings ESP for U.S. Steel is +2.41% as the Most Accurate estimate stands at 69 cents while the Zacks Consensus Estimate is pegged at 67 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: U.S. Steel carries a Zacks Rank #3 which when combined with a positive ESP, makes us reasonably confident of an earnings beat.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors at Play

U.S. Steel provided an optimistic view for 2017 in July. The company now expects net earnings of around $300 million or $1.70 per share for 2017, up from $260 million or $1.50 per share it expected earlier. The company is seeing positive sentiment in the markets served by Flat-Rolled and U.S. Steel Europe (USSE) units. Its Tubular unit is also gaining from operational and cost improvements and strong market conditions.

The Zacks Consensus Estimate for revenues for U.S. Steel for the to-be-reported quarter stands at $3,042 million, reflecting an expected increase of 13.3% from the year-ago quarter.

Net sales for U.S. Steel’s Flat-Rolled segment is projected to witness a 5.4% year-over-year rise as the Zacks Consensus Estimate for the third quarter is pegged at $2,094 million. The Zacks Consensus Estimate for net sales for the USSE unit is pegged at $662 million, reflecting a 14.9% year over year rise. Moreover, the company’s Tubular segment’s net sales are expected to increase by two-and-a-half fold year over year as the Zacks Consensus Estimate stands at $283 million.

With respect to pricing, the Zacks Consensus Estimate for average realized price for the Flat-Rolled unit for the third quarter is pegged at $735 per net ton, representing an expected 2.4% year over year increase. But this reflects an expected 0.9% decline from the sequentially prior quarter.

The Zacks Consensus Estimate for average realized price for the USSE unit stands at $586 per net ton, representing an expected 16.5% year over year rise. However, this reflects an expected 5.4% decline from the second quarter.

Average realized price for the Tubular segment is expected to increase 22.8% year over year and 4.4% sequentially as the Zacks Consensus Estimate stands at $1,288 per net ton.

U.S. Steel is expected to gain from healthy automotive demand. Also, U.S. Steel is aggressively pursuing actions to improve its cost structure through its “Carnegie Way” program that may lend some support to its third-quarter results. The company sees incremental impact from Carnegie Way benefits of $390 million for full-year 2017 as compared with 2016.

While U.S. Steel’s Flat-Rolled division posted healthy results in the second quarter, the company is still facing certain operational issues in this unit. Increased outage and plant maintenance costs are affecting this division.

U.S. Steel is implementing an asset revitalization plan aimed at improving its profitability and competitiveness. The plan is expected to take three-four years for its full implementation. The company sees higher plant-related spending as it accelerates asset revitalization investments and efforts. It sees maintenance and outage expenses (including those related to asset revitalization) of around $1.3 billion for the Flat-Rolled unit for 2017, higher than $950 million in 2016.

The U.S. steel industry also remains hamstrung by high levels of steel imports. The American market continues to be inundated with cheap steel imports from overseas producers despite a raft of punitive trade actions. A surge in steel imports put downward pressure on U.S. steel prices during the third quarter. Continued import pressure has not allowed steel pricing to keep pace with higher raw material costs during the third quarter.

Stocks to Consider

Here are some other companies in the basic materials space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Westlake Chemical Corporation (NYSE:WLK) has an Earnings ESP of +3.78% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CF Industries Holdings, Inc. (NYSE:CF) has an Earnings ESP of +1.83% and carries a Zacks Rank #2.

Ingevity Corporation (NYSE:NGVT) has an Earnings ESP of +2.94% and sports a Zacks Rank #2.

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