U.S. Steel: The Risks Remain the Same

Deutsche Bank’s Jorge Beristain and team raised their price target for U.S. Steel (X) to $23 from $15 yesterday following its smaller-than-expected loss. They remain concerned, however, about the downside that could result from lower steel prices. They explain:

Associated Press

Management guides for 2016 EBITDA of $850m (vs. $400m prior; DBe $657m) under current market conditions, intoning ~$825m of EBITDA in 2H16. Annualizing at ~$1.7bn plus taking into account incremental benefit from step-up in renewal of fixed price contracts (~$400m YoY improvement) and partial recovery in tubular business (~$100m), implies a best-case ~$2.1bn EBITDA potential for 2017E (DBe $965m). However, downward change in market conditions leading to lower steel prices remains high with Hot-Rolled Coil (HRC) having already corrected 3% to $616/ston (DBe $500 for 2017) against backdrop of -8% YTD apparent demand. By 4Q16 we expect renewed import pressure (domestic HRC at $286/st premium to world export price) attracted by stronger USD. Lastly, a decline in domestic scrap prices, seasonal slowdown and possible pushback from automotive OEMs on fixed pricing renewal are risks.

Shares of U.S. Steel have gained 2.6% to $27.61.