While United States Steel Corporation’s (NYSE:X) culture, the Carnegie Way, provided the impetus to help the steel giant in 2015, the strategy might not have enough oomph to tackle headwinds in 2016. With crumbling steel prices and decreasing demand from China, the global steel market is in a shambles.
Jefferies has cut its its earnings per share estimate for the first quarter of 2016, to -$1.04 from -$0.38. It has cut the estimate for full-year 2016 to -$2.63 from -$0.91 and for 2017 to -$0.34 (-$0.14) because of lower volumes and higher net costs.
The main objective of the Carnegie Way is to transform the corporation to create a lower and more flexible structure. The culture also focuses on trying to create a more elastic and consistent operation in order to alleviate the financial impact of prevalent economic conditions.
The research firm states that the steel giant faces major setbacks from declining United States/ Euro steel prices and demand along with a collapsing auto-steel market due to the shift to aluminum. With United States Steel taking the conservative way to tackle 2016, the research house has factored in limited benefit arising from the Carnegie Way
Jefferies has maintained a Hold rating with a target price of $6.5 for the next 12 months. The firm is not confident that United States Steel will meet guidance. United States Steel’s 2016 guidance predicts the steel giant to break even. However, the research firm has projected that even by cost reduction and retention methods fully in place the steel giant will not be able to reach break-even.
Furthermore, the guidance for $500 million free cash flow also looks difficult because of exceedingly low commodity prices. To meet the target the steel giant would require either large volumes, or an increase in prices with decreasing costs and increasing efficiencies which does not appear likely.
The research firm estimates that the expected $815 million cost savings derived from the Carnegie Way will not be enough to cover the losses the corporation is expected to make. The cost-base might be further challenged by higher import prices.
Moreover, Jefferies has also pointed out that a strong United States dollar is an incentive for other countries to export steel to the United States causing a glut in the steel market. If domestic steel producers increase prices, the difference between US and global prices will force further imports into the United States. In addition, a stronger dollar versus the euro will negatively impact the European production of United States Steel.
Inventory management will be the key to managing free cash flow volume but it won't be easy, because market conditions generally support large scale production a lot more. Bidness Etc recommends investors be mindful of the steel industry as it is in really bad shape and there are no signs of an immediate recovery.