Market Reaction to U.S. Steel Overdone, Sticking with $47 on Firm Outlook

U.S. Steel ( X ) recently announced earnings the company's first profitable quarter since the Q4 of 2008. The company posted revenues of $5.1 billion and net income of $222 million in this quarter, in line with our expectations. The capacity utilization of the flat-rolled products was 81%, and the company faced some losses in shipments in its European operations due to weaker demand and some planned maintenance items. However, demand in its U.S. flat rolled and tubular products looks healthy and supports our positive view despite the company lowering its guidance slightly for the remainder of the year. We believe the market's knee jerk reaction to earnings that sent shares down nearly 10% from pre-earnings levels are overdone. U.S. Steel competes with international steel companies like ArcelorMittal ( MT ), BaoSteel, Posco ( PKX ), Nippon Steel and ThyssenKrupp.

Our price estimate for U.S. Steel's of $47.60 is roughly 20% ahead of the current market price.

The U.S. flat rolled shipments are expected to reach 16 million tonnes by the end of the year, an approximate 6% increase over the last year's shipments. The steel companies have increased their production capacity overall to compensate the increase in demand for the flat rolled steel. The major chunk of the demand is expected to come from the automobile manufacturers as they look forward to replenish their inventory. However, the increased competition in the market has lead to an near term over-supply situation, pushing the spot market price of the flat rolled products down.

We have revised our average realized flat rolled steel price to $723 by the end of the year. The decline in the average price may not hurt the company as the company benefits from the declined in iron ore prices. We expect this trend to continue in the coming years as the biggest iron ore consumer, China, continues to explore domestic sources of iron ore production. This should help U.S. Steel's margins in the near term.

Tubular steel demand is expected to pick up in the remaining half of 2011, primarily driven by the energy related tubular products. The energy companies are increasingly focusing on horizontal and oil-directed drilling, which will in turn help lift the realized prices of tubular steel.

Even though the company has lowered its estimates for the next quarter, there is plenty of upside for the company in the second half of the year.

See our complete analysis for U.S. Steel

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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