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Bear of the Day: United States Steel (X)

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Markets have looked stronger in recent weeks, but with Q4 earnings season fast approaching, it seems prudent to avoid those stocks that have not been in favor with analysts ahead of their reports. One such company that has been spotted by the Zacks Rank is United States Steel (X - Free Report) .

U.S. Steel is a major steel producer that manufactures steel sheet and tubular products for the automotive, appliance, container, and construction industries, among others. The stock is currently sporting a Zacks Rank #5 (Strong Sell).

The Zacks Rank model is based on the relationship between share prices and earnings estimates. When a stock's earnings estimates are revised higher, that stock tends to move in similarly positive direction over time. Of course, the inverse is generally true as well.

U.S. Steel has witnessed negative EPS estimate revisions recently, both for its full fiscal year and to-be-reported quarter as well as its upcoming fiscal year. In the past 60 days, the Zacks Consensus Estimate for the company's annual earnings has dropped 54 cents. In that same time, the Zacks Consensus for the quarter U.S. Steel will soon report is down 38 cents.

Moreover, our Most Accurate Estimate—a read on earnings estimates based on recent timeliness—is six cents, or 3%, lower than the consensus. This tells us not only that estimates have trended down in the long-term, but also that the latest analyst estimates have been lower than previous expectations. This is not the trend investors want to see heading into the report later this month. Even if U.S. Steel were to outperform the new consensus, investors should remember that those expectations are muted.

U.S. Steel's struggles have not been a secret recently. The stock is down about 40% over the past six months, vastly underperforming the industry's roughly 23% decline in that time.

One key concern for U.S. Steel is its Flat-Rolled division, which accounts for about 65% of its business. The unit actually posted healthy results in the latest quarter, but the problem is rising expenses in the segment. The company has said it is seeing higher plant-related costs as it accelerates asset revitalization investments and efforts. This could put pressure on earnings in the near-term.

Another big issue over the past year has been softening challenges to cheap steel imports. The White House's original tariffs on steel imports were seen as a huge win for domestic producers, but eventually, concessions were made that excluded a number of countries and left room for others to negotiate exclusions. This could suggest a continued threat from cheaper imported steel.

There might be a value case to be made for the stock, as such a dramatic selloff has brought down its valuation quite a bit. Shares are trading at under 5x earnings, which is a discount to the industry's average of 8x. That said, we typically suggest avoiding value traps that are seeing their earnings estimates decay. If U.S. Steel can outperform, guide higher, and assure investors that things are turning around, then this stance might change.

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