What’s the Upside and Downside Risk in U.S. Steel’s 2016 Guidance?
Key Takeaways from U.S. Steel’s 1Q16 Earnings Call
U.S. Steel’s 2016 guidance
During its 1Q16 earnings conference call, U.S. Steel Corporation (X) gave 2016 EBITDA guidance of $400 million. Previously, during the 4Q15 call, the company had said it would barely break even at the EBITDA level this year.
Note that while Nucor (NUE) and Steel Dynamics (STLD) provide quarterly earnings guidance, U.S. Steel and ArcelorMittal (MT) give out annual EBITDA guidance. So it’s important for investors to understand the upside and downside risks in U.S. Steel’s 2016 guidance.
Upside potential
U.S. Steel’s 2016 guidance is based on the current market scenario. Spot hot-rolled coil (or HRC) prices are quoted in the ballpark of the low $500s per short ton, as you can see in the graph above. However, as the landed cost of imported HRC has been rising, US producers still have some room to raise their spot offers. Furthermore, U.S. Steel could look at restarting some of its idled plants should steel prices improve further. The company can then enjoy both pricing and volume gains in the second half of the year. Also, U.S. Steel is also looking at selling iron ore pellets from its spare capacity. This plan could be a new revenue line for the company.
Risks
U.S Steel’s EBITDA should be back-loaded, and the bulk of it would come in the second half of the year. If steel market conditions deteriorate over the next few months, U.S. Steel’s 2016 EBITDA will start to look like an uphill task.
Along with the earnings and guidance, U.S. Steel’s upcoming debt maturities attracted much attention during the 1Q16 earnings call, as we’ll explore in the next part of this series.
You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Metal producers currently form ~11% of XLB’s portfolio.
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