United States Steel (X, Financial) posted better-than-expected results for the second quarter 2014, fueled by the improved prices for steel this fiscal year and a continued initiative to cut down the costs on the growing surplus worldwide for steel. However, there have been as many headwinds such as bad weather conditions, higher repair and maintenance cost that kept pressurizing its top and bottom lines performance for the quarter.
Putting in a good performance
Nevertheless, United States Steel topped the Wall Street estimates on both the revenue and net loss. The company was pleased to report a narrowed net loss of $18.00 million or earnings of $(0.12) per share as compared to net loss of $78 million or earnings of $(0.54) in the same quarter a year ago. Revenue for the quarter was almost flat as it came in to $4.4 billion from $4.43 billion in the second quarter last year. Analysts on the other hand were estimating earnings of $(0.29) on the revenue of $4.12 billion for the second quarter 2014.
Looking ahead, the president and CEO, Mario Longhi, displayed a positive outlook for the third quarter as management now expects significant rise in both the operating and net income for its reportable segments and other business in the current quarter and remains firm to return to normal operating levels. The company additionally expects favorable weather condition, increased shipments, augmented operating efficiency and abridged repair and maintenance cost to contribute approximately $150 million to its operating income. In addition, the Pittsburgh-based company also expects its inventory level to rise in the second half as the company is working aggressively to reload its supply chain that should certainly drive its results in the remaining half of the year.
Markets gaining momentum
According to the recent report released by U.S Census Bureau, data highlights an upturn of almost 8.2% in the overall spending of construction in the United States as compared to the first half of 2013. In connection to this, the American Iron and Steel Institute also reaffirmed in one of its newly released article that more than half of the steel production is currently being used in the building and construction in the United States. This, of course is great news for United States Steel that should benefit from this underlying growth opportunity.
Also, the steel consumption in the United States has recently re-energized as the bad winter condition now almost disappeared, leading to increase in the steel production and increase volume shipments with the increasing Carnegie Way benefits that should help the company to maximize its margins amidst tough competition arising in the industry from its rivals such as Nucor (NUE, Financial) and ArcelorMittal (MT, Financial).
Besides, the company is strategically engaged in producing the new grades of steel that should create a competitive advantage over its peers in the future while proposing greater value to its customers. In fact the company has started producing Generation 3 grades of steel and intends to increase the commercial volume of these grades that should enhance its chances of returning to growth in the future.
Moreover, the company has at its fold many process development projects and customer focused projects with new products that should deliver higher margin to the company and assist the company to earn extra market share in the future. U.S steel is also developing automotive parts solutions for its customers using the new steel that will predominately be concentrated for usage in the vehicle platform.
Also, it has many new steel-based demanding vehicle platforms in 2015 that are directed to provide alternative materials for both truck and cars, offering inexpensive value proposition to its customers that should possibly help the company to supplement its growth further in the future.
Investments for the future
United States Steel is also heavily investing in the research and development process to enlarge and increase its capabilities that should assist the company to produce competitive steel products and solutions in the future. The company is also intensifying the capabilities of its research and technology center at Pittsburgh as it is enhancing it with the new research equipment and personnel that should upkeep the development of its steel solutions in the automotive and tabular products.
In addition, the rate of the flat-rolled steel market has improved this fiscal year as compared to the first half of last year 2013 which is now pushing both the spot and contractual industries to buy more of the flat-rolled steel that will certainly drive the demand and will lead to an increase in the prices that should assist the company to accelerate its margins in the remaining half of the year.
Besides, the company should benefit from the strong outlook for the oil country tabular goods or OCTG market. This market is also gaining momentum back and will soon return to growth this year as the company expects the average oil direct rig count in the United States to increase to its highest level in the current quarter that will lead to increased operator consumption of OCTG. Also, the company anticipates the oil directed recount to relatively stay strong with the oil prices to be approximately $100 per barrel throughout the quarter should increase its revenue this quarter.
Concluding remarks
United States Steel is currently trading at the forward P/E of 15.05 with PEG ratio of 2.85 for the next five years that indicate slow but constant growth for the stock. Moreover, the analysts have estimated CAGR of 6.50% which is higher than industry average CAGR of 4.85% for the next five years signifies a good growth for the company in the future. However, the stock offers tremendous short term growth as the analysts have estimated 275.70% growth this year with 23.10% growth in the following year thus investors looking for investing in the short term return stock can prefer buying more the stock and maximize its returns.
