U.S. Steel (X) Downgraded to Strong Sell: Here's Why

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Pennsylvania-based United States Steel Corp.X has been downgraded to a Zacks Rank #5 (Strong Sell) on May 23. The company recorded a net loss of $180 million or $1.03 per share in the first quarter of 2017, narrower than a net loss of $340 million or $2.32 per share a year ago. However, the results in the reported quarter include unfavorable adjustments of $35 million or 20 cents.

Barring one-time items, the loss came in at 83 cents per share for the reported quarter that missed the Zacks Consensus Estimate of earnings of 32 cents.

Revenues rose roughly 16.4% year over year to $2,725 million in the first quarter, but trailed the Zacks Consensus Estimate of $2,921 million.

United States Steel Corporation Price and Consensus

United States Steel Corporation Price and Consensus | United States Steel Corporation Quote

The company remains exposed to a cyclical industry and thus aims to revitalize assets to achieve reliable and consistent operations, improved quality and cost performance.

U.S. Steel has also underperformed the Zacks categorized Steel-Producers industry, suffering a loss of 47.4% in the past three months, compared with the industry's loss of 13.1%. Also, the stock exhibits a VGM Score of "B," thus making it an unfavorable pick.

The earnings of U.S. Steel have been witnessing estimate revisions in the past 30 days, with three estimates going down and none going upwards during this period. The Zacks Consensus Estimate of $3.37 and $4.14 for 2017 and 2018 declined to $1.09 and $2.27, respectively. Moreover, the Zacks Consensus Estimate for second-quarter 2017 has decreased from 94 cents to 52 cents, over the past 30 days.

The fall in estimates reflect the company's dismal first-quarter 2017 performance, as both the top and bottom line missed estimates. Moreover, the company has cut its earnings and EBITDA (earnings before interest, income taxes, depreciation and amortization) guidance for 2017. The company now sees EBITDA of roughly $1.1 billion for the full year, down from its earlier expectations of around $1.3 billion. The company now expects to post net earnings of around $260 million or $1.50 per share in 2017 compared with net earnings of $535 million or $3.08 per share it expected earlier.

U.S. Steel is facing certain operational issues in its Flat-Rolled division, which is hurting the results. Increased outage costs, operating inefficiencies and higher plant maintenance costs are affecting this division as witnessed in the recent quarter. The company sees higher plant-related spending moving ahead as it accelerates asset revitalization investments and efforts.

Moreover, the U.S. steel industry continues to remain under the risk of cheaper imports despite increased taxes on the imports recently. Unfairly-traded, subsidized imports are still flowing into the American market due to foreign producers' overcapacity.

Shares of U.S. Steel currently appear to be expensive as the Enterprise Value-to-EBITDA ratio of 7.04 is higher than the industry average of 5.25.

Stocks that Warrant a Look

Some better-ranked stocks in the basic materials space include Kronos Worldwide Inc. KRO , Akzo Nobel NV AKZOY and ArcelorMittal MT . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks Rank #1 stocks here .

Kronos has an expected long-term earnings growth of 5%.

Akzo Nobel has an expected long-term earnings growth of 11.1%.

ArcelorMittal has an expected long-term earnings growth of 11.4%.

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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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