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U.S. Steel (NYSE:X) -0.9% in Friday’s trading as GLJ Research sees “problems on the horizon,” double downgrading shares to Sell from Buy with a $13.85 price target.
Last week, the steel bellwether reported a clear Q4 earnings beat, but analyst Gordon Johnson said he is troubled by internals that included negative EBIT in the company’s Mini Mill and USSE segments, as well as a $72M EBIT loss at Big River.
Johnson noted U.S. Steel’s (X) reported quarterly Flat Rolled segment ASP has an R² correlation of 93.3% to the trailing three-month U.S. Midwest Domestic Hot-Rolled Coil Steel Future Index price dating back to 2013, the company’s quarterly Mini Mill segment ASP has an R² correlation of 95.5% to the trailing three-month U.S. HRC spot price dating back to 2021, its quarterly USSE segment ASP has an R² correlation of 95.5% to its reported Flat Rolled segment ASP dating back to 2013, and its Tubular segment ASP has an R² correlation of 74.04% to its USSE segment ASP dating back to 2013.
Using these correlations, Johnson expects U.S. Steel’s (X) Q1 EBITDA will come in below Wall Street consensus, and “given the U.S. HRC spot price was $776/st in Q3 2022, falling to $744/st in Q4… one can ascertain that X’s fundamentals will suffer when Q1 results are reported in roughly three months,” Johnson wrote.
The analyst sees three key headwinds for U.S. Steel (X): a disappointing China reopen, disappointing U.S. macro backdrop, and waning U.S. liquidity.
Citi analyst Alex Hacking said earlier this week that he expects a weaker steel market in this year’s second half.
