U.S. Steel (X) crushed analyst expectations in the fourth quarter, topping Wall Street estimates by a whopping 110%.
The company posted earnings of $275 million, or $1.83 per share, for Q4 2014. Compare this to analyst expectations of $0.89 per share.
The news propelled shares of the country’s second-largest steelmaker up more than 12.8% on Wednesday in heavy trading.
The Pittsburgh-based producer of flat-rolled and tubular steel products in North America and Europe saw its shares spike $2.75 to close at $24.01. More than 30.1 million shares traded hands, compared to an average daily trading volume of just 7.7 million shares.
Better yet, the company’s outperformance in the fourth quarter went a long way in snapping U.S. Steel’s streak of five consecutive years of annual losses.
For the year, the company reported full-year net income of $102 million, or $0.69 per share. That’s a dramatic improvement over 2013’s full-year loss of $1.6 billion, or -$11.37 per share.
Head Fake or the Real Deal?
Looking at the company’s fourth-quarter results, you might think things are finally turning around for U.S. Steel.
And there’s no shortage of analysts who agree. So let’s look at the evidence…
According to U.S. Steel’s outlook, the company expects moderate growth in the global economy during 2015, with a U.S. growth rate of 3% and the European region growing at roughly 1%.
And because global steel demands are directly related to GDP, the company foresees a low single-digit growth rate in the United States and Europe. These figures are in line with the World Steel Association’s (WSA) projections.
But are they correct?
The WSA’s projections are suspect for two reasons primarily…
The first is that the WSA fails to address oil prices that have fallen 59% since last June. This threatens to devastate an industry that has managed to expand since 2012 by supplying oil pipelines in Pennsylvania, West Virginia, and the Gulf of Mexico.
Already, U.S. Steel is desperately trying to mitigate the damage caused by falling oil prices and a stronger dollar, both of which continue to push steel prices down.
The company announced last Monday that it would slash operations at two plants in Alabama and one in Texas – affecting more than 1,900 workers. This is in addition to temporary shutdowns at two other production sites that idled 756 workers.
The second reason the WSA’s projections are suspect is their belief that flat-rolled steelmaking could get a demand boost as consumers increase durable goods purchases made from steel.
U.S. Steel is especially anxious for increased demand for flat-rolled steel orders from auto manufacturers.
Now, as my colleague, Tim Maverick, pointed out recently, Ford Motor Company is leading a revolution in vehicle manufacturing with lightweight aluminum instead of the much heavier steel.
You see, the change to aluminum not only makes vehicles lighter, but more importantly, it makes it easier for automakers to meet federally mandated Corporate Average Fuel Economy (CAFE) standards.
And quite frankly, U.S. Steel is completely unprepared for the loss of markets that will happen as automakers transition to aluminum.
Don’t Buy the Hype…
With declining oil capex and iron ore prices, U.S. Steel’s position worsens a little bit more with each passing day.
It will take more than the company’s adherence to its cost-cutting program, called the Carnegie Project, to keep this steelmaker fired up.
In all likelihood, Wednesday’s spike is about the best U.S. Steel will be able to give shareholders for the rest of 2015.