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Earnings Preview: US Steel

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United States Steel Corporation (X - Free Report) is scheduled to report its fourth quarter and full-year 2011 results before the market opens on Tuesday, January 31.

The Zacks Consensus Estimate for the quarter is a loss of 82 cents per share, representing a year-over-year increase of 54.89%.

With respect to earnings surprises, the company has beaten the Zacks Consensus Estimate in two of the trailing four quarters. This is reflected in the average earnings surprise of negative 20.76%, with positive surprises in two quarters and a negative surprise in both the first quarter of 2011 and the fourth quarter of 2010.

Third-Quarter Synopsis

US Steel reported third-quarter 2011 adjusted net income of $118 million or 72 cents per share, exceeding the Zacks Consensus Estimate of 55 cents per share.

The net income excluded $96 million or 57 cents per share of net foreign currency losses, primarily related to the accounting remeasurement of the inter-company loans. In addition to this, net income came in at $22 million, or 15 cents per share versus net loss of $51 million or 35 cents per share.

Revenues in the quarter improved 13% year over year to $5.1 billion from $4.5 billion a year ago, which was in line with the Zacks Consensus Estimate of $5.1 billion

Company’s Outlook

U.S. Steel expects flat-rolled results to reflect an operating loss, reflecting lower average realized prices on index-based contracts and spot market business. In addition to the idled facility carrying costs, the company expects to incur approximately $30 million in costs related to the ratification of the Hamilton Works labor agreement and associated facility restart costs.

Shipments are also expected to decline driven by cautious purchasing patterns due to the uncertain economic outlook and increasing domestic supply.

United Steel expects European segment results to be below the third quarter level. Shipments and average realized prices are expected to decline as market demand softens in response to the uncertain economic conditions in Europe, particularly Southern Europe.

Average realized prices for the Tubular segment are expected to be comparable to the third quarter and shipments are expected to be slightly lower as distributors actively control their inventory levels during the year-end, particularly for non-oil country tubular goods (OCTG) products.

Agreement of Estimate Revisions

In the past 30 days, two analysts made downward revisions for the fourth quarter and fiscal 2011. Meanwhile, two analysts made upward revision in the last 30 days for the fourth quarter of 2011 while one analyst made an upward revision for fiscal 2011.

In the last seven days, none of the analysts made any downward movements for the fourth quarter while one analyst made a downward revision for fiscal 2011. Two analysts made an upward revision for the fourth quarter in the last 7 days while 1 made it for fiscal 2011.

Magnitude of Estimate Revisions                                                      

In the last 30 days, the Zacks Consensus Estimate has improved marginally from a loss of 83 cents to a loss of 82 cents for fourth quarter and from break-even to 1 cent per share for fiscal 2011.

Over the last 90-day period, the Zacks Consensus Estimate declined form a loss of 71 cents to a loss of 82 cents per share for the fourth quarter of 2011 and from a profit of 23 cents to 1 cent per share for fiscal 2011.

Our Viewpoint

We believe that US Steel should see sequential declines in earnings due to a decrease in steel demand and pricing earlier in the fourth quarter, bumping up against an environment of elevated raw material costs. Furthermore, US Steel faces stiff competition from Arcelor Mittal (MT - Free Report) and POSCO (PKX - Free Report) .

We however feel that the company’s Tubular segment will have strong results as the demand for oil country tubular goods remains strong. Also US Steel is the only fully integrated domestic tubular producer and the only domestic producer offering a full range of products and services.

We further believe that the company’s announcement of the sale of its Serbian unit is a positive step as the unit was bearing losses for the company and was running well below its annual capacity of 2.4 million tons for the past five years.

In view of the above stated reasons, the company retains a Zacks #3 Rank on its shares, indicating a short-term (1 to 3 months) Hold rating and we have recommended the shares of the company as Neutral for the long term (more than 6 months).

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