Nowhere to Hide; Lowering Estimates and Target Price to $20
Weak Outlook, Lowering Numbers: Weak 4Q guidance across each
segment, although weak US and European steel markets should not be
a surprise to anyone. What is concerning is the magnitude of the
decline in Tubular segment profitability in 4Q, now well off peak
levels seen as recently as 2Q'12. With the tubular business likely
to remain challenged near term, US flat rolled also struggling to
gain price momentum and Europe's recovery continually in flux, we
believe there is more pain ahead before a recovery, and have
reduced our estimates accordingly. Maintain Neutral.
Cracks in the Tubular Market: X expects lower Tubular shipments
in 4Q, as oil rig counts have peaked, while gas rigs continue to
decline. Pricing is also under pressure from increased imports,
which exceeded 50% of market share in 3Q. Coupled with higher costs
and inventories at 5 months of supply, this does not translate
positively to 4Q or 1H'13 expectations.
Near a Price Trough? While X expects pricing to be lower vs. 3Q,
(which coupled with maintenance outages suggest a loss in 4Q), X
also said recent improvement in market conditions suggest we are
past the pricing trough.
European Profitability Fades: At USSE, X expects continued
economic weakness to result in declining shipments and pricing,
offset by lower costs.
EPS/TP Cuts: We lowered our 2012 estimate from $1.15 to $0.54,
our 2013 estimate from $3.00 to $1.48, and 2014 from $3.41 to
$2.02. Our Target Price declines from $24 to $20, representing 5.6x
our 2013 EBITDA estimate.
Pension Obligations/Expenses Improve: X highlighted that due to
the Remeasurement of Medical and Life Obligations, the annual
periodic OPEB expense will drop by $60m, while the funded status of
the plan improved by $410m.