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July 27, 2016, 10:40 A.M. ET
U.S. Steel: The Big ‘If’
By Ben Levisohn
Shares of U.S. Steel (X) are soaring after reporting a big earnings beat. BMO’s David Gagliano and Matt Cartoceti see “BIG numbers coming IF current strong market conditions remain intact. They explain why:
Associated Press
After the close, U.S. Steel reported 2Q16 adjusted EBITDA of $134 mm, vs. consensus of $127 mm, and vs. our estimate of $201 mm. Adjusted EPS was -$0.34, vs. our estimate of +$0.14, and vs. consensus of -$0.49.
2016 Outlook Commentary (this will be the focus). As expected, U.S. Steel raised its 2016 EBITDA targets, which are based on the assumption that current market conditions remain in place, with U.S. Steel indicating it expects 2016 adjusted EBITDA of ~$850 mm if the current environment persists (Our current 2016 EBITDA est is $669 mm, and consensus is $513 mm). In 1H16, U.S. Steel generated $27 mm of EBITDA, implying 2H16 EBITDA expectations of $823 mm, or $1.6B on an annualized basis. As previously noted, we estimate U.S. Steel has the potential to generate ~$2B in EBITDA in 2017 (once contracts roll off), if we assume current market conditions remain in place. This in turn implies a $40-50 share price (based on ~4.5x-5.0x annualized EBITDA), assuming current market conditions remain in place, which is not our base-case assumption. Initial thoughts: 1) The focus will likely be on the theoretical share price implications from the 2016 EBITDA target. However…beware the ‘run-rate math’ as a) market conditions (and EBITDA) change quickly for U.S. Steel, and b) this has proven to be a dangerous game in the past. 2) Nevertheless, considering the magnitude of the gap between the implied ‘fair value’ based on the run rate math and the current share price, in our view the outlook will be well received, and at the very least be supportive of the shares in the near term.