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Why Is U.S. Steel (X) Stock Dropping After Impressive Earnings?

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U.S. Steel Corporation (X - Free Report) released its second-quarter earnings on August 1 after the market closed. The major steel producer had some impressive results, but surprisingly shares are significantly down the day after the earnings beat.

For the quarter, U.S. Steel posted earnings of $1.46 per share, beating the Zacks Consensus Estimate of $1.15 per share. The company’s quarterly revenues of $3.61 billion also surpassed the Zacks Consensus Estimate by 6.47%.

U.S. Steel has now been able to beat earnings and revenue estimates for the last four quarters. Moving forward, the company also raised its full-year 2018 EBITDA guidance to $1.85-$1.9 billion.

The stellar second-quarter appears to indicate that Trump administration tariffs of 25% on most imported steel and 10% on aluminum imports are working in the steelmaker’s favor. This has decreased competition from imported steel and has allowed U.S. Steel to raise their own prices. On the earnings call, CEO David Burritt stated, “My view is that he [President Donald Trump] will continue to be supportive he gave every indication of that.”

Success for steel producers hasn’t only been limited to U.S. Steel, as profits more than doubled in the second-quarter for Nucor (NUE - Free Report) and Reliance Steel & Aluminum (RS - Free Report) had a positive 14.39% earnings surprise. Relative to these peers, U.S. steel has had a better performance in the last 12 months.

 

Typically, an earnings beat, strong guidance, and favorable market conditions would drive share prices up. However, that hasn’t been the case so far. Shares of U.S. Steel are down 9.91% in late afternoon trading hours on Aug 2, the day after its earnings report.

Although it is difficult to exactly know why the market has reacted this way, there are a couple possible answers.

U.S. Steel adjusted its Q3 EBITDA to $525 million, down from market expectations. The full-year guidance was raised, but investors may have thought that a strong Q3 outlook was crucial, especially with rising steel prices.

Moreover, there may also still be some uncertainty regarding the current trade climate. President Trump recently met with European Commission President Jean-Claude Juncker to reconsider the steel and aluminum tariffs. Worries surrounding trade talks and the overall political climate could be overpowering the earnings results.

While shares have dropped since the earnings report, this could also just be a temporary dip. In the long-term, U.S. Steel remarked that it has made progress with its $2 billion flat-rolled segment asset revitalization program, to be completed in 2020. The company expects the program to improve EBITDA by $275-$325 annually by then.

But for now, the market doesn’t share that optimism.

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