United States Steel Corporation (NYSE:X), a Zacks Rank #5 (Strong Sell) stock, has been disappointing investors of late. Shares of this steel major have logged a negative return of around 39% year-to-date, hurt by its dismal first-quarter results and reduced outlook for 2017.
Should investors dump X stock from their portfolio? Let’s find out.
Dismal Q1 & Downbeat Outlook: U.S. Steel came out with lackluster first-quarter 2017 results, missing analysts’ estimates on both earnings and revenues. The company suffered a sizable net loss of $180 million on a reported basis in the reported quarter.
U.S. Steel also cut its earnings and EBITDA 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. U.S. Steel 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.
The disappointing first-quarter results coupled with the company’s downward guidance revision sparked huge sell-off as U.S. Steel’s shares crashed as much as around 27% a day after the earnings release – the biggest one-day drop since it went public in 1991.
U.S. Steel is An Underperformer: U.S. Steel has underperformed the Zacks categorized Steel-Producers industry over the past six months. The company’s shares have lost around 45.8% over this period, compared with roughly 17.3% decline recorded by the industry.
U. S. Steel Estimates Head South: Annual estimates for U.S. Steel have moved south over the past 30 days, reflecting the negative outlook of analysts. Over this period, the Zacks Consensus Estimate for 2017 has declined by around 35.6% to $1.05 per share. The Zacks Consensus Estimate for 2018 has also moved down 16.2% over the same timeframe to $2.53.
Operational Headwinds: U.S. Steel is implementing an asset revitalization plan aimed at improving its profitability and competitiveness. The plan, a part of its Carnegie Way initiative, is expected to take 3-4 years for its full implementation. The company plans to invest around $300 million in asset revitalization in 2017, higher than 2016 level.
However, the company expects more downtime in its facilities this year due to this program that will limit its steel production volumes. Accelerated implementation of this plan is expected to affect flat-rolled shipments volumes in 2017.
U.S. Steel continues to face certain operational issues in its Flat-Rolled division, which is hurting the results of this unit. Increased outage costs, operating inefficiencies and higher plant maintenance costs affected this division in the first quarter. The company sees higher plant-related spending moving ahead as it accelerates asset revitalization investments and efforts.
Overvalued Stock: The company’s stretched valuation is another concern. In case of U.S. Steel, the trailing 12-month EV/EBITDA multiple, which is often used to value steel stocks, is 7.20 whereas the Steel-Producers industry’s average trailing twelve months EV/EBITDA multiple is lower at 6.51.
Other Sector Stocks to Consider
ArcelorMittal sports a Zacks Rank #1 (Strong Buy) and has expected long-term growth of 11.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Schnitzer Steel delivered a positive average earnings surprise of 73.3% over the trailing four quarters and carries a Zacks Rank #2 (Buy).
Universal Stainless, also a Zacks Rank #2 stock, has an expected earnings growth of 127% for 2017.
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